Dutch power Cal’18 premium to Germany may narrow further

A premium held by the Dutch Calendar Year 2018 Baseload to the German equivalent has fallen by 46% since the start of the year as a bearish trend on TTF gas prices has pulled down the Dutch contract, while the German product has gained in value.

According to technical analysis, both the TTF and German power Cal’18 products are now in a downward trend, although if the bearish move on the TTF proves more significant, the Dutch power premium to the German equivalent could fall further during April.

Movements

The TTF Cal ’18 Baseload has been in a bearish trend since January, losing 6% of its value between 1 January and 29 March. This bearish trend has been driven by losses in the oil market, with Brent crude also falling by 6% over the same period.

In contrast, the German front year contract has increased 1% in value since the start of the year, with Rotterdam coal futures and EUA carbon prices, the main drivers of the German far curve, moving in opposite directions.

Correlations

Price movements on the Dutch power curve are driven by both the TTF natural gas hub, due to the role of gas as the marginal fuel in the country, and the neighbouring German power market, due to significant interconnector capacity between the two countries.

In 2016, Dutch front year baseload had a correlation coefficient of 0.95 to TTF and 0.97 to German power – perfect positive correlation being 1 – highlighting the strong link between Dutch far curve prices and the two markets.

However, so far this year the correlation coefficient to TTF has increased to 0.96, while the link to German power has fallen to just 0.73.

This suggests the Dutch Cal ’18 has be driven primarily by falling TTF prices since the start of the year.

As a result, the premium of the Dutch Cal ’18 to the German equivalent has fallen from €5.55/MWh on the first trading day of 2017, to just €2.975/MWh on 29 March.

Spot prices

Low Dutch spot prices in relation to Germany may have also played a role in narrowing the premium on the far curve, one trader said.

In 2016, the Dutch Day-ahead Baseload was assessed below the German equivalent 23 times in 253 trading days, or 9% of the time. In contrast, in 2017 the Dutch Day-ahead has already settled below Germany 23 times in just 62 trading days, or 37% of the time.

As a result, the Dutch premium to the German equivalent on the Q2 ’17 Baseload has fallen by 33% since the start of the year, to €4.55/MWh. According to the trader, this impact may have filtered further along the curve, also influencing the Cal ’18 Dutch contract.

Outlook

Prices on the TTF far curve will be driven largely by movements in oil. While Brent prices have risen this week to a three-week high, data showed that domestic US output rose for a fifth straight week, suggesting the bullish trend this week may be short-lived.

Technical analysis also suggests that while the TTF Cal’ 18 has gained value this week, it remains in a downward trend and would need to rise by a further €0.80/MWh to convert more bulls.

The German power Cal ’18 has more downside than upside potential, a second trader said to ICIS this week, a conclusion also supported by technical analysis of the contract.

However, the product is currently caught between strong support and resistance levels, meaning it might be difficult for it to move decisively in either direction in April.

If the bearish trend on TTF prices outstrips that on German power, the Dutch power Cal ’18 premium to the German equivalent could narrow further in April matthew.jones@icis.com