German power near-curve risk intensifies, other energy markets ease off

Short-term, prompt electricity and natural gas prices have been a key driver of the near-curves of wholesale markets in recent weeks. Traders have incorporated risk premium into contracts for delivery later this winter as mainland Europe’s cold snap continues, draining already low hydropower stocks as well as gas volume held in storage.

ICIS looks at the pricing of day-ahead and weekend products in week 3, compared with where the week-ahead or, for gas markets, the WDNW, closed on Friday.

A discount in delivery to the forward product would be a bearish signal for the prompt, which could lead to some of the risk premium evaporating from the near curve, for example, for the front-month.

A delivery premium, on the other hand, could be expected to have the reverse effect.

German power

A reduced wind power outlook in week 3 initially pushed up spot prices, but these have reduced as the week has gone on, because temperatures have proved warmer than previously expected.

Nevertheless, the week is still set to deliver above where the forward product expired, and contracts through to the far curve have gained in value relative to Monday.

Historical data suggests that strong delivery of the current week could push German wholesale power prices even higher on Friday. In similar weeks since 2011, prompt and near curve contracts gained between 0.5% and 2% in the week’s final session, as traders corrected for assumptions that led them to undervalue the week prior to delivery.

German and Dutch gas

Day-ahead prices somewhat rebounded during the second half of week 3, following multi-session lows for Tuesday delivery in both markets.

The near curve also fell strongly on Monday, but this was more a result of bearish currency moves early in the week and a general correction downwards. No Day-ahead has exceeded the Friday WDNW, and the week looked set to deliver €0.45/MWh below this on Thursday afternoon in Germany, and €0.61 in the Netherlands.

These differences are fairly marginal however, and traders now expect a return to bullish moves on strong fundamental and technical drivers.

French power

Consumption in week 3 has been lower than anticipated. Before the week began, peak demand had been forecast by grid operator RTE at around 102GW for the Thursday, which would have been a near-five-year high.

At the time of writing, it was expected to be no more than 94GW, which would however still be very high in historical terms,

Prices on the near curve came down sharply on Monday and then rebounded somewhat the following day, before flattening. This was a result of the week’s extremely low delivery compared to expectations, and traders told ICIS they are bearish for near curve contracts in Friday’s session.

French gas

The spot has outturned below the WDNW contract so far in week 3, as concerns over low LNG sendout in the south of France has slightly eased. The near curve has also come down as a result.

Concerns have lessened a touch over LNG supply, but gas prices in the south of France are still expected to remain much higher than usual.

Italian power

The Italian day-ahead, exchange-settled PUN prices have on average been below the closing price of the Week 3 ’17 forward product, allowing for the weekend in the weekly contract.

According to traders, the mismatch between PUN and the forward contract on the OTC markets was the effect of overestimated demand in the north but also underestimated supply in the south, where prices have been considerably lower. On top of this, there were complications in forecasting the price of French deliveries – a key driver for delivery prices in the energy-hungry north – as French demand was revised down from Friday’s estimates.

Expectations are of spot prices continuing to be less than the OTC forward. Traders also expect grid operator Terna to adopt some measures that, if triggered, would introduce some volume at €0.00/MWh in hours 18-21 on Thursday and Friday to combat potential system tightness if France is unable to spare export volume.

The north continues to be pegged to France, but prices in the south are considerably lower and temperatures are rising back towards the norm. energy.info@icis.com

ICIS used a combination of data including exchange settlements in markets where the majority of day-ahead volume was exchange traded, ICIS own OTC assessments for forward products, and most recent reported OTC trades for pricing the weekend period.