Supply shift pulls Hungarian-Romanian Q3 products apart

The Hungarian Q3 ‘16 premium over its Romanian counterpart has widened since mid-April as a supply shift has pulled the markets apart. But with the clock ticking on the expiry, most market participants expect the spread to narrow as the risk premium built into the Hungarian contract slides off.

Traders usually make a profit by buying the Romanian Q3 product and selling the Hungarian equivalent. Generally, cheaper Romanian flows head into neighbouring Hungary, linking the two markets together.

The road so far

An increase in Balkan hydropower generation in February triggered a reversal in the Hungarian-Romanian March ’16 spread.

The Q3 ‘16 product followed suit with the spread between the two markets tightening, taking its cue from the day-ahead outturns on the exchange (see graphs). Data indicates that prices on the Romanian exchange OPCOM and the Hungarian equivalent HUPX moved closer to the German EPEX spot.

The Q3 ‘15 spread had remained above €4/MWh between February and May last year, but the tightening spread during February and March this year brought into question whether Romania could become the more expensive market for an extended period.

However, in mid-April the Hungarian Q3 ’16 product rebounded in line with carbon-driven gains on other continental markets and a tighter supply in the region as several nuclear power plant were scheduled to go into maintenance, a trader said (see graph).

“The rise in fuels and CO2 pushed up the German prices and German prices lifted everything,” he said.

Meanwhile the Romanian market held steady. Traders were torn over why the moves did not replicate on the Romanian product. One source said that liquidity on the OPCOM-run over-the-counter platform was simply not high enough for the contract to keep the spread steady. Two other traders pointed to the hydro situation, which has been gradually improving. Water levels in the country stand at 79.39%, according to the latest data from grid operator Transelectrica. Hydro stocks can easily affect the risk premium for the Q3 product because hydropower plants are used to cover high consumption in case of hot temperature in the summer months.

Outlook

Most traders thought the spread between the Hungarian and Romanian Q3 ‘16 contracts could tighten by expiry.

“There are no really strong bullish signals for the Hungarian July ‘16,” said one trader. Another market participant pointed to the difference between the Hungarian June and July contracts as unjustified.

While June ’16 expired at €33.50/MWh, July ’16 was assessed by ICIS at €37.03/MWh on 8 June.

“There is no fundamental reason for such a difference, just the unknown factors such as hydro, temperatures, consumption and production which are keeping the price high,” the trader said.

He also pointed to the similar fundamentals for June and July regarding unit availability and cross-border capacity.

Monthly cross border capacity from Austria to Hungary and Slovenia was cut to zero for June and July.

Also, some regional nuclear maintenance that could tighten the supply situation for Hungary is due to end on 18 June (see graph), which could pressure June delivery prices afterwards.

A lower June ‘16 in delivery could be bearish for July ‘16 and Q3 ‘16, as price forecasts adjust to take account of the discount of day-ahead prices compared to the June ’16 expiry price.

Fear of the unknown

On the other hand, nuclear maintenance in the Czech Republic – which is connected to Hungary via Slovakia – could add risk premium.

Maintenance work at the country’s two nuclear plants will remove up to 2GW from the Czech generation fleet at some times during the third quarter. Maintenance activity also took place at various units last year but did not coincide to the same extent.

The outages add an element of uncertainty to the outlook. Last summer Czech maintenances were extended, so market participants may regard the published schedule with scepticism.

The lower availability of Czech production could limit export potential to Hungary, which would be bullish for Hungarian prices.

Some traders are betting on the Romanian-Hungarian Q3 ‘16 spread widening in delivery. Reservoir stocks in Romania rose sharply in recent weeks, potentially capping summer delivery prices and putting in place “an upwards limit,” a trader said

“But in Hungary and Serbia last year, the sky was the limit,” he said. sophie.udubasceanu@icis.com and ellie.chambers@icis.com