European Gas and Power Price Fundamentals: Q3 2009

Introduction

The growing role of wholesale traded energy markets across Europe creates a greater need for players throughout the value chain to be aware of the latest market movements and developments. From the wellhead or power station gate to the end-user, volatility in the spot and forward price of power and gas is creating an increasingly challenging environment for all market participants.

Scope

*An examination of the wholesale gas price trends in Europe's three key markets - the UK NBP, the Zeebrugge Hub and the Dutch TTF.

*An assessment of traded power prices in the UK, Belgian, Dutch, German and French wholesale power markets

*A review of the past three month's global oil markets: what's driving the price of oil and which fundamentals will determine the future

*Insight and analysis into the impact of wholesale markets on the wholesale / retail price interface

Highlights

Crude oil prices continued their bullish recovery through Q2, rising at an even faster rate than during Q1 and causing alarm amongst policy makers

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 month-ahead power prices have remained subdued but year-ahead has firmed, indicating optimism for Europe's long run economy

Reasons to Purchase

*Establish the current level of wholesale and retail energy prices and the fundamental drivers behind movements in the traded value of gas and power

*Understand how wholesale pricing impacts different facets of the value chain, identifying the potential to limit risk through hedging strategies

*Forecast future developments in the traded price of gas and power in order to successfully take advantage of arbitrage opportunities

Report Highlights
Highlights

Crude oil prices continued their bullish recovery through Q2, rising at an even faster rate than during Q1 and causing alarm amongst policy makers

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 month-ahead power prices have remained subdued but year-ahead has firmed, indicating optimism for Europe's long run economy
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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
Can we attribute the bullish recovery in oil prices to fundamentals or are speculators inflating another commodity bubble? 2
Crude oil prices continued their bullish recovery through Q2, rising at an even faster rate than during Q1 and causing alarm amongst policy makers 2
The oil price forward curve is currently in Contango: the market expects even higher prices in the future, reflecting optimistic economic forecasts 3
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 4
The wide capacity cushion, declining input costs and a surge in oil-based ETF activity implies current prices may not be driven by fundamentals 5
Concern over the role of speculation and the effect of high energy prices on the recovery have precipitated renewed calls for tighter regulation 6
Why haven't we seen the same bullishness in wholesale gas & power markets as we have in crude oil? 7
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 7
European year ahead baseload power prices stabilized in Q2'09, albeit at a low level 8
Prompt power prices found their floor during Q2 2009 and appear to be edging upwards 9
Q2'09 saw year ahead gas prices stabilize and recover slightly 10
The lack of significant movement in European gas prices indicates markets are struggling to find a signal amidst an uncertain economic outlook 11
Although prices are subdued in Europe, they remain relatively firm next to the saturated American market 12
Technological advances in gas extraction from shale will mean onshore unconventional production will meet increased proportions of US demand 13
European month-ahead power prices have remained subdued but year-ahead has firmed, indicating optimism for Europe's long run economy 14
Why have carbon prices increased despite low gas and wholesale power prices? 15
Contrary to rational expectations, the price of emitting green house gases actually rose in Q1'09 and remained relatively firm in Q2 15
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 16
Pound sterling reversed its slide against the US dollar and the euro, although not enough to constitute a recovery 17
APPENDIX 18
Datamonitor European Wholesale Price Appendix 18
Q2 2009 saw year ahead gas prices stabilize and recover slightly 19
Prompt gas prices continued to fall in Q2'09, aided by a ready supply of LNG 20
Peaks power prices dipped further in Q2 2009, in line with reduction in consumption 21
Q2 2009 saw a mild recovery in the FTSE, and a surprising rally in the price of a barrel of Brent crude 22
Despite the recession, coal contracts showed signs of stabilizing after heavy losses through 2008 23
Prompt NBP slid further in Q2 on the back of LNG being re-directed to Europe from Asia and the US 24
TTF followed NBP during Q2 2009, with a drop in prompt prices and flat forward prices 25
Belgian gas prices softened in line with the fundamentals at the NBP and TTF 26
In light of eroding demand, UK power prices continued to soften 27
Dutch power prices remained well below 2008 levels, despite both showing upward movements 28
Falling power prices were also evident in Belgium trading 29
French wholesale power prices found their bottom 30
German power prices showed signs of leveling out 31
UK gas retail prices showed nascent signs of declining but have not yet fully reflected wholesale price drops 32
UK suppliers are slowly passing on the NBP wholesale cost savings to domestic retail customers 33
UK power prices continue to fall in Q2 2009, and end-user bills are finally starting to reflect these falls 34
UK suppliers have been slow to pass on cost savings from the wholesale to the retail market 35
Definitions 36
This brief contains a number of industry standard terms 36
Methodology 37
Further reading 37
Ask the analyst 37
Datamonitor consulting 37
Disclaimer 37
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List of Tables
List of Figures
Figure 1: Brent and WTI Prices July 2008 - August 2009 2
Figure 2: Brent Crude Forward Curve on July 17th: Contango occurs when oil for prompt delivery is discounted to oil for delivery future further 3
Figure 3: UK oil and gas prices diverged in late Q1 one and have remained relatively disconnected 7
Figure 4: European year ahead baseload power prices stabilized in Q2'09, albeit at a low level 8
Figure 5: Prompt power prices found their floor during Q2 2009 and appear to be edging upwards 9
Figure 6: Q2'09 saw year ahead gas prices stabilize and recover slightly 10
Figure 7: NBP Yr+1 prices have continued to rely more on sentiment than on signals 11
Figure 8: M+1 natural gas prices on the NYMEX are trading below $3/mBTU for the first time since 2002 12
Figure 9: Unconventional extraction will continue to meet a growing proportion of total US consumption 13
Figure 10: European power year-ahead peak prices have dipped less than month-ahead 14
Figure 11: Although a long way off Q2'08 levels, coal prices picked up in Q2'09 15
Figure 12: EUA prices have risen steadily from a nadir of €8 in February 16
Figure 13: Currency rates 17
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