European Gas and Power Price Fundamentals: Q3 2009

Table of Contents

DATAMONITOR VIEW

• CATALYST
• SUMMARY

ANALYSIS

• Can we attribute the bullish recovery in oil prices to fundamentals or are speculators inflating another commodity bubble?
  • Crude oil prices continued their bullish recovery through Q2, rising at an even faster rate than during Q1 and causing alarm amongst policy makers
  • The oil price forward curve is currently in Contango: the market expects even higher prices in the future, reflecting optimistic economic forecasts
  • Buoyancy in oil futures can be partly explained by slowing rates of economic decline in the West, and an astonishing return to growth in Asia
  • The wide capacity cushion, declining input costs and a surge in oil-based ETF activity implies current prices may not be driven by fundamentals
  • Concern over the role of speculation and the effect of high energy prices on the recovery have precipitated renewed calls for tighter regulation
• Why haven' t we seen the same bullishness in wholesale gas & power markets as we have in crude oil?
  • European day ahead gas prices stabilised at a low level in Q2 and have not displayed the same erratic upward trends as seen in oil over the same period
  • European year ahead baseload power prices stabilized in Q2' 09, albeit at a low level
  • Prompt power prices found their floor during Q2 2009 and appear to be edging upwards
  • Q2' 09 saw year ahead gas prices stabilize and recover slightly
  • The lack of significant movement in European gas prices indicates markets are struggling to find a signal amidst an uncertain economic outlook
  • Although prices are subdued in Europe, they remain relatively firm next to the saturated American market
  • Technological advances in gas extraction from shale will mean onshore unconventional production will meet increased proportions of US demand
  • European month-ahead power prices have remained subdued but year-ahead has firmed, indicating optimism for Europe' s long run economy
• Why have carbon prices increased despite low gas and wholesale power prices?
  • Contrary to rational expectations, the price of emitting green house gases actually rose in Q1' 09 and remained relatively firm in Q2
  • The slight return in carbon prices from mid-Q1 and subsequent levelling off in Q2 suggests that, gripped by panic players oversold EUAs in H2' 08
  • Pound sterling reversed its slide against the US dollar and the euro, although not enough to constitute a recovery

APPENDIX

• Datamonitor European Wholesale Price Appendix
  • Q2 2009 saw year ahead gas prices stabilize and recover slightly
  • Prompt gas prices continued to fall in Q2' 09, aided by a ready supply of LNG
  • Peaks power prices dipped further in Q2 2009, in line with reduction in consumption
  • Q2 2009 saw a mild recovery in the FTSE, and a surprising rally in the price of a barrel of Brent crude
  • Despite the recession, coal contracts showed signs of stabilizing after heavy losses through 2008
  • Prompt NBP slid further in Q2 on the back of LNG being re-directed to Europe from Asia and the US
  • TTF followed NBP during Q2 2009, with a drop in prompt prices and flat forward prices
  • Belgian gas prices softened in line with the fundamentals at the NBP and TTF
  • In light of eroding demand, UK power prices continued to soften
  • Dutch power prices remained well below 2008 levels, despite both showing upward movements
  • Falling power prices were also evident in Belgium trading
  • French wholesale power prices found their bottom
  • German power prices showed signs of leveling out
  • UK gas retail prices showed nascent signs of declining but have not yet fully reflected wholesale price drops
  • UK suppliers are slowly passing on the NBP wholesale cost savings to domestic retail customers
  • UK power prices continue to fall in Q2 2009, and end-user bills are finally starting to reflect these falls
  • UK suppliers have been slow to pass on cost savings from the wholesale to the retail market
• Definitions
  • This brief contains a number of industry standard terms
  • Methodology
  • Further reading
  • Ask the analyst
  • Datamonitor consulting
  • Disclaimer

FIGURES

• Figure: Brent and WTI Prices July 2008 - August 2009
• Figure: Brent Crude Forward Curve on July 17th: Contango occurs when oil for prompt delivery is discounted to oil for delivery future further
• Figure: UK oil and gas prices diverged in late Q1 one and have remained relatively disconnected
• Figure: European year ahead baseload power prices stabilized in Q2' 09, albeit at a low level
• Figure: Prompt power prices found their floor during Q2 2009 and appear to be edging upwards
• Figure: Q2' 09 saw year ahead gas prices stabilize and recover slightly
• Figure: NBP Yr+1 prices have continued to rely more on sentiment than on signals
• Figure: M+1 natural gas prices on the NYMEX are trading below $3/mBTU for the first time since 2002
• Figure: Unconventional extraction will continue to meet a growing proportion of total US consumption
• Figure: European power year-ahead peak prices have dipped less than month-ahead
• Figure: Although a long way off Q2' 08 levels, coal prices picked up in Q2' 09
• Figure: EUA prices have risen steadily from a nadir of € 8 in February
• Figure: Currency rates