LONDON (ICIS)--An unexpected rebound in natural gas prices in week 14 is likely to support European power liquidity across April, particularly if the volatility continues over the remainder of the month.
A sharp sell-off brought power volumes back to a normal level in February and March, ending a stretch of several months where more-range-bound energy commodity prices depressed liquidity relative to prior years.
- After the TTF front month gained 22% in the second half of week 14, European power markets are nicely for robust liquidity over the remainder of the month.
- Gas traders will attempt to establish whether a large increase in LNG vessel arrivals holds over the summer and how pipeline supply will react if it does. These questions have important connotations for European power markets, where gas typically makes up a key share.
- New circumstances take seasoned commodity traders out of their comfort zone, spurring volatility that attracts hedge funds and other risk-inclined participants to trade.
- There is also plenty of potential for bull or bear runs, which drive liquidity by prompting traders to enter a market in order to re-hedge, take a profit or stop a loss.
- The Brent crude front month has gained roughly a third since the start of the year, as OPEC cut production alongside a series of supply threats. Oil affects coal transportation costs and is indexed in some long-term gas delivery deals.
- Long-range weather forecasts indicate the potential for dry summer weather to raise the power price premium, although these forecasts can be relatively inaccurate.
- Power demand growth in China and other Asian markets could support coal prices. There is also a sentiment that this could be the year that Chinese coal production returns to previous high levels after smaller mines were shut down in 2016. This would send prices downwards.
- There is a major risk that LNG overcapacity continues and a bearish gas market undercuts all other drivers to weaken power prices.
- In an extreme case, traders will need to adjust to a new normal where gas becomes the key marginal price-setting fuel on a host of power curves in Europe.
While a mild winter held back liquidity between November and January, margins got so comfortable that gas prices fell to multi-year lows in March.
This prompted hedging in the major German, UK and Italian power markets as traders adjusted the curve down in line with the possibility that the LNG surge would continue, covering themselves for the possibility that prices could fall further.
Germany accounts for around two-thirds of all power transactions in Europe, meaning small gains in liquidity in February and March offset major falls in some other markets.
Strong volatility in the wider energy complex is hitting volumes in many southeast European power markets, as traders in the region are conducting more financial, rather than physical trade, as a result. The lack of an extreme weather event such as last winter’s cold snaps reduced liquidity in other smaller markets.