Extreme swings hit power markets in second half of May
Thursday 3rd June 2021
It has been a strange fortnight for energy markets with a dramatic collapse in power and gas Annuals followed by a significant recovery. Markets are currently down on the most recent peak, and there is a slightly more bearish picture overall in the closing prices of the past few days.
The collapse in prices had two key drivers – a change in weather conditions and a fall in carbon prices. European weather conditions turned warmer, meaning gas demand fell and storage replenishment could begin in earnest – whilst storage is significantly down on typical levels for this time of year, the fact that injections are happening has de-risked the gas market somewhat. Gas prices have since recovered on supply issues and some expectation of high cooling demand in China and parts of Europe. A fall in European carbon prices came with the launch of the UK’s own carbon trading scheme. Prices fell on an expectation that the EU market would be flooded with overbought allowances. Whilst carbon did drop, it soon recovered and the new UK market is now trading at a cost premium to the EU counterpart.
Generally, there does seem to be more bearishness in power and gas Annuals than has been seen for quite some time, so it is possible this is the start of a correction from what seems to have been a relentless rise through 2021 so far. There is naturally positive economic momentum as the world opens up post COVID, but it is clearly early days, and setbacks to positive sentiment come with every new variant reported.