Gas prices diverge from potential supply risk to align with current fundamentals

01 November 2023

Gas Market

Ample risk premium fell out of the UK gas market during yesterday’s session as prices align with market fundamentals. It was near delivery contracts that took the brunt of the downward momentum, with the Dec-23 contract shedding 13.92p to settle at 124.07p. It appears European markets are struggling to price supply risk as no long term trends have emerged from the opening month of the winter gas season. When we compare yesterday’s movement to the previous week, it’s evident how gas markets are torn between short-term oversupply and the potential for supply risks, even with EU industrial and domestic gas demand approximately 22% below pre covid levels in 2019. Downward pressure also surfaced in the prompt market, with gas for day ahead delivery closing at 105.40p. Nine LNG cargoes are expected to arrive into the UK within the next week.

Power Market

GB baseload power futures took a step lower during yesterday’s session. It was contracts for near delivery that took the biggest hit, as risk premium retreated on the back of healthy near term fundamentals. The Dec-23 contract lost £10.00/MWh to close at £102.50/MWh while the front season Summer 24, moved £7.25/MWh lower, a 17 session low. Significant downward momentum was witnessed in the power prompt market, with baseload power for day ahead delivery closing at £74.74/MWh, down £34.54/MWh day on day. Strong wind generation coupled with weak demand supported the downward trend.

Oil Market

A sense of market stability returned to global oil markets on Tuesday as the Brent crude front month failed to make any meaningful move, closing at $87.41 per barrel. Prices pushed high initially on the back of a drop in eurozone inflation but retreated as OPEC’s oil output increased by 180,000 barrels per day in October, primarily sourced from Nigeria and Angola. Despite yesterday’s stability it would be foolish not to acknowledge the potential impact the Israel-Hamas conflict could have on oil prices if the conflict spreads in the Middle East, as the region holds 48% of the world’s oil reserves. Brent crude has traded at an average of $88.77 in October, $3.67 discount when compared to the previous month.

Markets this morning

Price movement is relatively flat in the UK gas market this morning, with the front month Dec-23 contract last trading at 125.25p, up 1.18p from yesterday while Q1-24 last traded at 132.53p. Despite the UK gas system opening slightly oversupplied prompt prices have edged higher with the Day ahead contract last trading at 119.00p. LNG send out has ramped up this morning to 51MCM and is expected to maintain this level due to the influx of cargoes expected in the coming days. The Brent crude front month last traded at $85.89 per barrel, and we can expect supply concerns to remain firm amid geopolitical tension in the Middle East, a region that accounts for 48% of global oil reserves.
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