Traders sit tight on Q2 ’17 as major power markets reassess risk – part 2 of 2

In previous years, risk premium has been sold out of wholesale electricity contracts for Q2 delivery in southern and western European markets during the preceding winter.

The sell-off has begun as early as week 42, as confidence that energy systems will be fit to cope throughout the winter and on into the summer has spread across the markets.

But, in part two of this two-part article, ICIS finds consensus this year that things could be quite different if risk averse traders choose to hang on to Q2 volume.

Although wholesale prices have risen sharply in recent weeks across southern and western Europe, it is quite standard for a Q2 product’s risk premium to peak around week 42 in late October, or early November. But this is typically erased by the time it reaches delivery.

In France, in four of the last five years, Q2 baseload contracts have delivered below where they ware valued on the forward market towards the end of the previous October in week 42. Over the past five years, the average Q2 delivery discount in France compared to the week 42 value of the forward product has been 11%.

The only exception to this was 2015, when concerns about hydropower stocks pushed up day-ahead prices throughout the second quarter, driving a premium in delivery over the forward market value in week 42. This again strikes a chord with France’s increasingly tight hydropower stock situation this year.

Pattern

However, only looking at a week 42 snapshot versus delivery obscures the picture, because there has been a clear, longer-term pattern in recent years: In the 12 months before delivery, Q2 contracts have tended to remain fairly static until November, then they begin to fall. This even included the French Q2 ’15, which ultimately delivered higher than any daily valuation of the forward product over the previous 12 months.

Looking beyond France, relative to their average price in July, by November the Q2 products in half the markets across southern and western Europe have gained in value. But by March, all are priced lower than in July, by an average of 11%. The UK average refers to only the last two years, when the market switched to using the Gregorian calendar in line with the rest of Europe.

According to one Dutch trader: “The Q2 [for the following year’s delivery at the TTF gas hub] can get very bullish over the summer because April is the end of the withdrawal season for gas. We tend to see high day-ahead prices in April as a result of the end of winter storage withdrawals.

“But towards Q4 it can come off when we start to get a better idea of whether or not it will be a cold winter.”

Outlook

So a number of drivers suggest the Q2 sell-off pattern might not repeat itself this year. “I expect any downside would have to be weather-driven,” said one French trader.

“Usually mild weather in winter means windy conditions, so that’s two bearish drivers hand in hand.

“But, if the weather does turns colder, we will have to wait longer until we see any downside.”

An Italian utility-based power trader said that Q2 tends to lose value if the delivery price of November is lower than the November forward at expiry, because this is a sign the supply picture over the winter should be comfortable. In this case the timing of any cold snap, whether before or after the new year, is key to the value of Q2.

“But I don’t think Q2 will lose value this year,” the trader said, referring to the large spread between Q1 ’17 and Q2 ’17 that has built up due to France’s nuclear availability forecasts affecting the winter contracts.

“Q2 ’17 could remain strong if some more nuclear plants are postponed until March and April,” he said. william.peck@icis.com