Commodity highs the culprit behind bullish power prices

Wholesale power prices have hit highs recently. The May and June power contracts both hit their highest levels since the turn of the year, while seasonal power contracts out to winter 2020 reached record highs spanning one to three years. This blog highlights the main causes of such notable bullishness, particularly the influences derived from the gas and commodity markets. 

The driver behind the above annual highs stems primarily from the intertwined relationship between oil and gas which, despite being a historical phenomenon shaped by highly integrated markets, persists today. Generally, the relationship is evidenced in how changes in crude oil prices can have similar implications to the price movement of gas.

Observing one half of this relationship, Brent crude oil prices have been buoyant of late, reaching $75.0/bl on 24 April – their highest level since November 2014. Prices have been influenced by an array of bullish fundamentals, most of which have been geopolitical pressures stemming from events in the Middle East.

Additionally, the gas market has been subject to its own upwards pressures on prices, largely driven by the cold snap at the end of February. The ‘Beast from the East’ saw gas storage much depleted in Great Britain, as is demonstrated in Figure 1 below. This also shows an ongoing trend of low gas reserves, with stocks declining 42% since March to 0.4Bcm, far below t

Such a trend has only been strengthened by the closure of Britain’s only long-range storage site, Rough. Currently the site is in the process of using its remaining volume of cushion gas. This leaves the country to depend upon medium-range storage (MRS), LNG deliveries and pipeline imports. 

A graph showing UK gas storage stocks 2014-2018

The concern of low storage stocks has been a persistent issue both here and the continent, with notable lows still present in Belgium and the Netherlands. This leaves many nations in precarious positions regarding freak weather events similar to those experienced already this year. Such events can exclusively cause gas demand in the period to increase or decrease by as much as 5%. As a result, European summer gas demand is forecast to rise to enable the restocking process, whereas observing the summer-winter gas spreads there is currently no incentive for UK MRS to restock.

In addition to the oil-gas relationship pressures, power prices will have also gathered momentum from strengthening EU ETS carbon prices, with the price of carbon incorporated into power prices due to the emissions costs incurred when generating electricity. Carbon reached a seven-year high of €14.2/t on 16 April. The drivers behind this growth seem to be related to the Market Stability Reserve, which appears to be working as intended to boost prices of that commodity.

Cornwall Insight’s weekly Energy Market Bulletin publication keeps track of wholesale energy commodity prices and developments in the carbon market.