When COVID-19 struck between Mar- and Apr-20, commodity markets underwent a period of strong devaluation, with demand severely reduced as major economies restricted work and movement.
This was true both for prompt and futures markets, with uncertainty around the length and impact of lockdown measures weighing on futures valuations. This bearish period began to ease as a multitude of COVID-19 vaccines brought about hopes of a quick exit from lockdown, as well as the massive fiscal stimulus packages provided by governments which reduced the likelihood of a recessionary period.
Q-21 saw a strong bull market take grip, in part due to the optimism of demand recovery, but predominantly due to the impact of emissions markets. The benchmark EU Emissions Trading Scheme (ETS) contract rose to record levels, driven by speculative interests as the UK and EU tightened emissions reduction targets. This commodity weighs on wholesale valuation, with power assets liable to carbon markets hence increasing costs of power generation.
Moving into the Summer-21 period, the easing of lockdown measures and carbon futures have directed markets, with carbon futures have made gains greater than 30% over the previous three months.
Yesterday the UK began auctions for its own ETS, which rose above the value of the EU ETS in its first day of trading, providing further upside risk. Gas market fundamentals have also offered a bullish signal to wholesale markets, with a relative dearth of LNG and depleted regional storage levels elevating gas-fired power premiums along the curve.
As we stand, wholesale energy market remains in a period of considerable turbulence.
In the absence of a third wave (associated with the Indian COVID-19 variant), pandemic dynamics offer continued upside to far-dated contracts. The Bank of England has forecast a 7.25% growth in UK Gross Domestic Product for 2021, as the gradual reopening of the economy releases pent-up buying pressure.
However, globally there is some uncertainty around quick demand recovery, with rising cases in countries like India.
The UK ETS is providing further upside risk to UK energy futures, with it making strong gains in its first day of trading. It is also receiving support from UK emissions policy as we head towards the COP26 climate meeting in Glasgow, with the UK’s ambitions to be a climate pioneer.
Gas market dynamics are providing mixed signals for the short- and long-term. Depleted gas storage in the UK and on the continent, combined with global LNG dynamics incentivising cargoes away from European hubs, are likely to provide bullish signals for the near-term with demand outweighing supply.
Further along the curve however, the US has waived sanctions on the company behind the RUS-GER Nord Stream 2 pipeline, providing downside potential as the projects completion becomes more certain.
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