Turkish January ‘15 contract has room to fall – traders

The January ’15 Baseload contract on the Turkish wholesale electricity curve might lose its price parity with the December ’14 Baseload in the coming weeks, as bullish expectations supporting January’s high price have partially faded during recent sessions ,following a government announcement ruling out regulated tariff increases.

As a consequence, January ’15 could go into delivery at a discount against the current front-month contract, thus inverting the spread trend seen on the over-the-counter (OTC) market last year.

The price parity of December ’14 and January ’15 has been a consistent feature of trading sessions in November so far. The two contracts were assessed on a par at the close of three out of seven November sessions, with the spread peaking at a maximum TL1.00/MWh (€0.36/MWh) on 6 November.

Some market participants have bet on the parity price to persist since October. A financial spread trade at TL0.00/MWh was closed for 10MW on 21 October, although a second deal pricing the December ’14-January ’15 spread at TL2.50/MWh worth 5MW was also reported to ICIS on 5 November.

However, even a TL2.50/MWh spread between the current two front months marks a mutation from last year’s market sentiment.

January ‘14 Baseload was consistently bid and offered at a premium against December ’13 throughout November 2013, ICIS data shows.

Furthermore, both contracts stood well below their 2014 and 2015 equivalents (see graph 1). In fact, this underlines market participants’ anxiety about future deliveries.

December ‘14

With regard to the current front month, market participants are adamant to learn the lesson of 2013 day-ahead delivery prices.

The December ’13 product went into delivery averaging TL157.97/MWh during its spell as a front month in November 2013.

This compared with an average Day-ahead delivery price on Turkish exchange PMUM of TL192.02/MWh throughout December – a whopping TL34.05/MWh premium over the correspondent OTC monthly value.

December 2013 deliveries were boosted by a mix of high demand and a tight gas system which raised the cost of pivotal gas-fired power generation in the country.

A round of planned and unplanned outages to thermal plants in October and November this year, joined by poor wind-power generation, is not helping to ease traders’ bullish sentiments about spot deliveries during the upcoming December.

“At the moment the market is pricing December ’14 assuming the worst possible scenario for next month,” one source active on the OTC market said.

However, another trader agreed that the December contract does not have much more room to climb, considering that “it is fairly unusual to see hourly spot prices growing above TL220.00/MWh”.

Nevertheless, the consensus among traders polled by ICIS in recent weeks was that the front month did not have much room for falling either.

High December spot deliveries in 2013 as well as strong PMUM prices in November 2014 so far, which averaged TL177.88/MWh as of Wednesday, are providing the front month with a high floor.

January ‘15

The floor for January ’15 taking into account January ‘14 deliveries would be much lower.

PMUM deliveries during the first month of 2014 averaged only TL163.23/MWh, or TL28.79/MWh less than the spot average in Decemebr ‘13, according to PMUM data (see graph 2).

This was strikingly close to the average TL163.04/MWh value of the January ’14 contract assessed during November 2013.

Market participants, however, consider January ‘14 deliveries exceptionally low.

“This year Turkey didn’t have any cold snap during January – temperatures were actually much lower in December. This was unusual though, and we need to take the cold-snap factor well into account for 2015,” one trader said.

Yet, trading on the second front month was also being supported by robust expectations of a new round of regulated tariffs increase at the start of the new year, on the lines of what happened at the start of Q4 this year.

In October the government revised upward by 9% regulated electricity and gas tariffs for eligible customers, prompting immediate price spikes on the wholesale market ( see TEHD 2 October 2014 ).

A similar prospect loomed on market participants until last Friday, when the government announced no tariff increase will be rolled out before summer 2015.

According to sources, the announcement clears room for a depreciation of January ’15 Baseload, although no meaningful downtick was seen on the contract during the following sessions.

“The high November PMUM prices are still supporting the near curve, preventing January ’15 from falling [after the government announcement]. But they should go down sooner or later,” one senior trader said, adding that this could represent a good opportunity to go short and sell the monthly contract.

Meanwhile, the Russia-Ukraine situation still constitutes a concern strong enough to drive prices up even despite bearish fundamentals for December and January, traders agreed, especially if limitations for imports of gas flows at Bulgaria’s Malkoclar entry point, which started in October, continue well into winter. Riccardo Patrian