Bear Market Presents Opportunity For Some Energy Buyers

The turn of the New Year has – finally – seen an end to one of the longest bull runs in the energy market’s history. Since prices collapsed at the beginning of the pandemic, gas and power prices have been on a steady, upwards trajectory. Initially, this increase was (mostly) attributed to macro-economic drivers, a recovering economy and a shortage of gas in the UK markets as Liquid Natural Gas (LNG) cargoes headed east to the Asian markets, where prices traded at an even higher premium.

Of course, the invasion of Ukraine by Russia in February ’22 accelerated the pace of these increases: with European powers implementing strict sanctions on the Russians - including the scrapping of the Nord Stream 2 pipeline – flows of Russian oil and natural gas into Europe have dropped to their lowest ever levels. Prices increased to levels barely believable a few years ago: the Winter-22 power contract traded at a high of £845/MWh and the equivalent gas contract to 827p/therm. To put these prices into context, the power contract traded around £45/MWh, while the gas contract traded around 42p/therm at points during the pandemic lockdowns. In the run up to this winter, there were very real concerns that there would be gas – and as a result, power – shortages across the European continent. UK businesses were spared the worst of this due to significant support from the British government, although this is now due to be tapered back from 1st April.

Thankfully, the effort right the way across the continent to focus on gas storage injections has paid dividends and the worst of the crisis (for now) has been averted. With a mixture of luck (due to unseasonably warm weather across much of Europe) and a well-prepared market, some of the risk premium built into longer-term contracts started to drop in the last quarter of 2022. This fall in prices has accelerated dramatically over the last couple of weeks, with spot prices now trading at levels close to where they were pre-invasion of Ukraine. Day-ahead power is now trading close to £100/MWh and day-ahead gas at around 150p/therm. This has led to further decreases in the seasonal contracts, with the Summer-23 power contract now trading around £190/MWh and the gas contract at around 200p/therm. While these prices are still significantly higher than their long-term averages, compared with the highs they saw last year (£580/MWh for power and 726p/therm for gas), it is clear how much premium has been lost from these contracts.

While there is still significant potential for prices to fall further – a continuation of both the warm weather seen across the continent and limited withdrawals from gas storage facilities would surely lead to this – the level of forward prices compared to both historic prices and the government-supported ‘price cap’ could represent a good buying opportunity for customers with a budget-driven risk appetite. Upside risk remains prevalent within the market: the geo-political tensions across Europe remain precariously high, while any large cold-snap towards the end of the winter and the start of spring could still lead to sizeable withdrawals from storage and accordingly a tight market. As a result, businesses – particularly those with contracts renewing in the first half of this year – may want to consider starting the tendering process and lock in some of the benefit of the current bearish market.

Your account manager at OEM will be following up this briefing note to discuss your contracting options for 2023 and beyond.