Lower volatility on both the UK’s gas and power forward curves since the start of the year is behind a 40% drop in over-the-counter prompt and curve volume between January and May, according to trade data reported to ICIS.
The UK has bucked the trend of other European power markets, where curve liquidity has largely grown year-on-year ( click here to read story ). This includes liquid markets such as Germany and Italy.
The heaviest falls have been evident at the more illiquid ends of the market, with a 55% fall in volume on month contracts beyond the front month and a 61% fall in trade on the far curve beyond the front two seasons.
But front month and front season volume still fell heavily year-on-year, with a 32% drop on the former and 24% drop on the latter.
Prompt volume was the least affected between January and May, although a reluctance to hedge the Weekend Baseload was also evident from an 18% drop in volume. Day-ahead volume fell just 8%.
“I’m not that surprised about the drop off in liquidity given how range-bound everything has been for the last two to three months,” one trader at a renewables company said. “Q2 last year was much more volatile.”
The change in volatility on the power curve has largely replicated that on the country’s NBP natural gas market, with volatility on the front winter increasing markedly in January and April 2016 (see graph).
In contrast, the market on the front winter has been comparatively calm since the start of this year in the aftermath of extreme volatility relating to French nuclear supply concerns in late 2016.
The unprecedented volatility at the start of last winter had a notable impact on hedging on the far curve, with 32% more volume traded on contracts beyond the front two seasons in Q4 2016 compared with the first five months of 2017.
As a result, positions taken on the far curve during that period might mean there is less volume to hedge further out currently.
However, the lower price and volatility environment that usually manifests in the summer could be causing some participants to hold off their hedging activity, according to another source at an energy procurement company.
“It’s summer complacency,” he said. “The market is not ready to start hedging further out.”
A greater variety of fundamental drivers in the NBP market along with more volatile macroeconomic factors helped increase the market’s volatility, according to one prompt trader.
“Each day was different looking at our archive summary,” he said. “I don’t see any reason why there would be a sudden change in [hedging] strategy from far [curve] to near.” email@example.com