Updated: Electricity and gas near-curves retain gains as temperature drop looms

Many of Europe’s electricity and natural gas markets have reacted to reports of an impending drop in temperatures for the first time this winter, with the continent’s key hubs on Tuesday holding onto sharp near-curve gains recorded at the start of the week.

But with the forecasts relating to no earlier than week-ahead contracts, and being subject to some doubt, the way is now paved for traders to price in the winter’s first market-moving shift in temperatures as the week progresses and the degree of accuracy firms.

Key natural gas hubs led the way, with the British NBP bullish from the prompt out to December on Monday. The front month largely held its gains on Tuesday.

The Dutch TTF moved in tandem with Britain. It also held onto these gains on Tuesday, as the front month edged higher. “We’ve seen a new two- to three-week forecast showing the first real cold weather outlook so far this winter,” one TTF trader had confirmed after Monday’s session.

In Germany, Europe’s bellwether electricity market, equivalent contracts jumped as the week opened, with week-ahead up 4.2% and December 3.4%. Again, the front month remained strong on Tuesday.

The picture was similar across the continent: “December went up on relatively high spot prices and forecasts for a cold spell next month,” one Polish electricity trader said after Monday’s session.

On UK power, traders moved to cover any short positions on December, although a later forecast threw a further spanner in the works: “The forecast initially was for cooler temperatures but then it was changed to above seasonal average,” one UK trader commented.

Risk

Europe’s markets remain well insulated against any short-term increase in demand for energy. German gas storage sites were 99% full at the weekend, with Britain’s at 92% and Dutch stocks at 89%.

In addition, although a drop in temperatures that is clearly sufficient to move markets is expected, this does not mean a below-average cold snap is due. The shift is more from above average down to normal.

So little risk to supply security exists, yet the impact on the markets is already noticeable because of how bearish the start of the winter has been.

At the end of the previous week, German power traders had sold the December to its lowest since ICIS began pricing it. Participants at the NBP did the same, as did those at the TTF. This has in general increased the premium held by the front quarter over December across the European energy complex.

“Before today, there has been a trend of people selling December and buying Q1,” one Italian power trader said at Monday’s close. “But today that reversed.”

Therefore, with short positions accruing on the front month, risk is predominantly stacked on the up-side. The markets will now continue pricing this in during the remainder of the week, with all eyes on the weather forecast as delivery of the week-ahead nears. Jamie Stewart