Year-ahead gas and power prices have had a volatile start to 2017. Contracts rallied going into the end of the year as weather forecasts were revised to indicate a cold start to the new year. While many of these late 2016 gains were sharply reversed as trading began in 2017, gas and power prices are now starting to rise again, with a focus still on the supply-demand balance for the rest of the winter.
Weather forecasts were changed around Christmas to indicate a much colder January for Europe than previously expected. While temperatures for the UK were unchanged and forecast to be around or above seasonal normal, a colder Europe and Russia would increase demand for energy across the region. The resulting increased competition for energy resources would support gas and power prices, and forward prices rose to reflect this possibility. For the UK, there are also concerns over supply flexibility. Rough storage was on maintenance over the Christmas break, meaning it was unable to inject over the weaker demand period. This has left the UK with less gas available than might otherwise have been the case.
Stronger crude oil prices were also providing support to UK gas and power contracts. Expectations of a drop in world crude oil output from the start of 2017 pulled up oil prices. An agreed production cut among OPEC and non-OPEC producers – if successful – should cut output by close to 1.8 million barrels a day. Traders are now waiting on any evidence that the agreed cut is actually taking place.