German power far curve might shed value in summer

Laura Raus


A rise in German far curve electricity prices is fundamentally unjustified and annual contracts will probably shed value in the next few months, even though they are unlikely to reach the record lows seen mid-February, several market participants and observers have told ICIS.

A stronger energy complex has supported annual power contracts recently. Some of its strength has come from higher priced oil futures, but their gains rely partly on temporary production disruptions such those caused by as wildfires in Canada. Fuel markets remain fundamentally oversupplied.

“I don’t think this is very sustainable,” a trader at a European electricity company said about the recent far curve gains.

“I don’t see any big fundamental changes since March, the market is not really tighter. Everything is more or less the same and the [power] forward curve shouldn’t be much different,” said an energy analyst, who wished not to be named.

Summer outlook

Financial company Deutsche Bank expects oil futures to be slightly weaker than now in the third quarter due to the end of some production disruptions, its energy analyst Josef Auer said.

“They are likely to be somewhere in the €40.00-50.00/bbl range,” said Richard Sarsfield-Hall, energy expert at Poyry Management Consulting, about oil price movements in the near future.

The prices might get some support from lower US oil production, he said.

Irrespectively of this, European gas prices are likely to shed value over the summer due to high LNG supply and storage levels, according to Sarsfield-Hall.

The German far curve is increasingly correlated to gas futures as the country’s nuclear phase-out and the planned removal of 2.7GW of lignite capacity into a reserve mean gas plants can increasingly be profitable during peakload hours, Peter Zeniewski, analyst at consultancy Wood Mackenzie said.

It will depend primarily on coal and gas futures whether the German far curve will stabilise or move further down, he said.

The German Cal ’17 Baseload might drop to around €24.00-23.00/MWh in the near term, power traders said.

Q4 outlook

Deutsche Bank expects crude futures to make small gains in the fourth quarter after some weakness in the summer and to be at around €48.00-50.00/bbl by the end of 2016. Most other energy commodities are likely to follow a similar pattern, Auer said.

Oil prices affect coal prices via transport costs and gas futures through a number of long-term gas supply contracts that are indexed to oil. Besides, oil prices affect other energy commodities via sentiment. Power traders expect the German far curve to continue following oil prices closely as it has done in recent months.

If the outlook for the next winter points to cold temperatures, the gas curve is likely to gain later in the year due expectations for higher heating demand and their impact on storage levels, Sarsfield-Hall said.

Based on gas futures outlook, he expected the German far curve to shed value over the summer and possibly to rise again thereafter.

Further ahead

Deutsche Bank expects moderate oil price gains in 2017-2018 provided that outlook for large economics, and accordingly for oil demand, remains healthy. But the futures are unlikely to move significantly above $60.00/bbl in the next couple of years, Auer said.

Such an outlook could translate to rather stable German power prices as these will continue to be pressured by growing renewables capacity, he said.

If fuel prices will be rather stable, then German power prices are likely to decline somewhat over time, Bengt Longva, analyst at consultancy Nena, said.

But the planned French carbon floor could give some support to German prices due to higher export demand, analysts said.

The Cal ’17-’19 are trading at similar levels on the German power market, indicating most market participants currently expect quite stable prices in the next few years.


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