Energy traders in Germany face a risk-laden winter, with both power and gas markets exposed to potentially large pricing shifts.
In a matter of weeks, the outlook for the German power market, usually large enough to shrug off supply shocks in neighbouring countries, has transformed. Risk premium has been priced into winter products as traders have sought to guard against nuclear problems in France.
But this means potential for downside, which a few weeks ago was typically limited, is now very real indeed.
Gas traders should be in for a less bumpy ride, but as ever, the risk is very real going into the coldest months of the year. For gas market participants, the real challenge will be balancing off major supply volume entering the country from the east, against British and Dutch demand from the west.
The low wholesale power prices Germany saw last winter look unlikely to reoccur in coming months as a bullish mood has swept across the entire region.
Only recently, the outlook was different. In mid-September, the German Q4 ’16 and Q1 ’17 Baseload were trading below the average day-ahead price over the previous six months of winter, which was €29.20/MWh.
But things changed very quickly, and the Q4 ’16 Baseload expired at €33.60/MWh, ICIS figures show, while the Q1 ’17 Baseload was last assessed on Monday at €35.43/MWh, above even the Q1 ’16 peak during delivery which was €29.08/MWh according to exchange EPEX Spot data.
The recent gains of German winter contracts have been driven by concerns over low nuclear availability in France and coal price increases triggered by China’s energy policy.
Traders find both drivers hard to predict and winter contracts carry a hefty risk premium with nobody wanting to be caught short in the coldest months of the year.
In fact this pattern began to emerge over the summer, as the Q3 ’16 Baseload delivered above its expiry value as frequent nuclear maintenance extensions in France took traders by surprise.
Last winter, the Q1 ‘16 delivered €8.02/MWh below the Q4 ’15, despite holidays reducing demand in December, as weather was mild and fuel prices at record lows in the first months of this year.
Quarterly contracts for this winter followed a similar pattern recently, with the Q1 ’17 below the Q4 ’16. But their spread has now reversed In line with movements on the European coal curve.
One trader described mood on the German power market as “hysterical”, but it is hard to tell whether recent price spikes are an overreaction. “It depends on whether France will bring back nuclear capacity, but the [maintenance] schedule doesn’t seem to be holding,” one trader said.
If, against the expectations of market participants, the downward revisions of French nuclear availability forecasts stop and availability normalises soon as has been indicated by the country’s transmission system operator RTE, German winter power prices could plummet.
Prompt contracts at the German NCG and GASPOOL hubs may increase their usual discount to the equivalents traded on the British NBP during winter due to limited storage availability in Britain and ample supply from Russia.
German storage facilities entered October 95% full, around 18 percentage points more than one year earlier.
Since the start of the winter, Germany has been receiving more than 200 million cubic metres (mcm)/day from Russia via the Nord Stream and Yamal pipelines.
Meanwhile, the British Rough storage facility was taken offline in June, cutting the site’s injection period more than three months short. From 1 November, withdrawals will be possible again as 20 of the site’s 24 wells will be available.
This means that Britain entered the heating season with around one-third less gas in store than one year earlier. Rough usually meets around 10% of demand during winter, and held 1.26 billion cubic metres (bcm) at the time of writing in October.
This might mean that Britain will have to procure gas from foreign sources, including LNG and its European neighbours.
With this in mind, some traders on the German market think it would be possible for the NCG discount to the NBP to widen considerably during the coldest months of the season.
During the fourth quarter of 2015, the average NBP Q1 ’16 premium over the NCG was €0.50/MWh. During the first six sessions of this October, the NBP Q1 ’17 held an average €0.827/MWh premium over the NCG equivalent. And this is only likely to widen further.
“German storage is full and GASPOOL will receive huge Russian volume which will be passed on to the NCG and then [the Dutch] TTF before it goes to Britain. The storage situation in Britain isn’t good so prices will rise to attract more volume,” one trader said, adding that British demand could pull up other European markets during winter. email@example.com and firstname.lastname@example.org