Technical signals show NBP upside despite soft fundamentals

Source: Heren

2018/11/09

LONDON(ICIS)--Technical indicators suggest that the NBP December ’18 product is currently undervalued and prices are likely to rebound in the short term. But despite this, the fundamental picture remains weak and will likely limit any sustained period of gains.

Technical analysis carried out by ICIS focusing on the December ’18 product showed that the contract has been dealing close to the lower Bollinger band, which is an indicator of an oversold market (see box-out).

 

When a market becomes oversold it can signal to traders that the product may garner buying interest in the short term and could therefore see its value increase.

On 5 November, the formation of a white candle at the bottom of the triangle formation on the daily candlestick chart signalled the end of the last bear run which saw the contract lose 6.5% of its value in the space of four trading days. During the two proceeding sessions the contract gained value and broke above the triangle formation, partly driven by higher demand expectations and a stronger energy complex.

Despite these indicators, it is likely that the current strength seen over the last two trading sessions is not a signal for a bull run but that the curve is going through a correction.

 

An upward correction is likely up until 72p/th is taken, which is the second level of resistance on the Fibonacci retracement line. If this threshold is surpassed then a sustained period of strength may be seen.

Soft fundamentals

The fundamental picture for December still looks bearish with ample supply being available in the form of LNG and mild weather expectations.

Since the start of October, Britain has received 12 LNG cargoes and the island is expected to take delivery of three more before the end of November.

LNG send-out from Britain’s three terminals into the grid has averaged 26 million cubic metres (mcm)/day since the start of the new gas year, 15mcm/day higher year on year.

This should provide more than enough supply flexibility in conjunction with Norwegian deliveries and imports through the Dutch BBL pipeline. Supply margins will tighten if the weather turns colder and stocks are drained but current weather models do not indicate an unusually cold December.

Meteorologists representing various weather organisations told ICIS earlier in the month that an El Nino event has occurred, meaning a characteristic colder first quarter of 2019 but a warmer start to the winter.

Temperatures across Britain have been on average 1.8°C above the seasonal average since the start of the winter and as result lower heating demand across the country has weighed on prompt contracts, with the curve following.

Temperature is a significant driver in the UK as heating demand accounts for around 40% of Britain’s gas use.

Prices on the wholesale electricity market are to a large extent determined by the marginal cost of the generator brought online to satisfy demand, which in the UK is predominantly gas-fired power units.

Because of this, the UK power market follows the British gas price closely with fundamentals such as renewable generation and nuclear availability also having an impact on wholesale power and gas prices.

National Grid data indicated that nuclear availability across Britain is set to improve, climbing from 6.3GW to 7.2GW by week 50 which may lead to some downside on prompt power prices.

Technical analysis tool kit

Bollinger Bands are a set of lines plotted two standard deviations away from a simple moving average. The wider the band is the more volatile the price of the asset is. Market participants believe the closer the price is to the upper band, the more overbought the market, and the closer the prices move to the lower band, the more oversold the market.