European Gas and Power Price Fundamentals: Q4 2009

Introduction

The growing role of wholesale traded energy markets across Europe creates a greater need for players throughout the value chain to be aware of the latest market movements and developments. From the wellhead or power station gate to the end-user, volatility in the spot and forward price of power and gas is creating an increasingly challenging environment for all market participants.

Scope

*An examination of the wholesale gas price trends in Europe's three key markets - the UK NBP, the Zeebrugge Hub and the Dutch TTF.

*An assessment of traded power prices in the UK, Belgian, Dutch, German and French wholesale power markets

*A review of the past three month's global oil markets: what's driving the price of oil and which fundamentals will determine the future

*Insight and analysis into the impact of wholesale markets on the wholesale / retail price interface

Highlights

Prices have been driven from their 2008 highs by the global downturn, with levels expected to remain muted over the near term. While residential and service sector demand remained relatively inelastic, industrial gas consumption declined in line with the EU recession and fall off in industrial production

The US is now awash in natural gas as productivity from unconventional wells (shale) has risen dramatically due to new technology in hydraulic fracturing and horizontal drilling. Natural gas in storage hit an all time high in November at 3,833 billion cubic feet (Bcf), a level around 12% above the 5-year average (2004-2008).

Gas prices have failed to benefit from the drivers of the oil price, namely improving demand fundamentals, investment inflows and relatively tighter outlook on supply. Gas prices are expected to remain muted in 2010 as much of the global economy sees and oversupply of gas

Reasons to Purchase

*Establish the current level of wholesale and retail energy prices and the fundamental drivers behind movements in the traded value of gas and power

*Understand how wholesale pricing impacts different facets of the value chain, identifying the potential to limit risk through hedging strategies

*Forecast future developments in the traded price of gas and power in order to successfully take advantage of arbitrage opportunities


Report Highlights

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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
Will the moderate rise in European economic output be enough to put a firm floor beneath power and gas prices in the near term? 2
Although the European economic downturn has likely reached a bottom the recovery will be prolonged and face numerous challenges 2
The outlook on energy consumption has improved on the back of a moderate rise in key economic indicators 3
Fuel prices are expected to remain subdued while European GDP is forecast to expand yet lag growth in developing economies 4
Have fiscal and monetary efforts, albeit beneficial to GDP growth, contributed to the start of another asset price bubble, namely in equities, oil and other commodities? 5
Historically low short-term US interest rates have weighed on the dollar, and led to a return of the carry trade 5
The rebound in financial markets has been swift yet failed to filter through to the real economy 6
Loosening credit conditions should stimulate industrial production, GDP growth and energy demand in Europe 7
Market participants are looking to new CFTC measures to enhance transparency in commodity markets and reveal the influence of investors on prices 8
Oil prices have rallied dramatically from the mid-February lows, lifted by improving demand fundamentals and investor activity 8
A dominant question in the oil market is whether prices are disconnected from supply-demand fundamentals 9
The CFTC's new proposed measures should help promote greater commodity market transparency 10
The oil market remains in contango, with a portion of the forward curve trading above $100-level on positive demand outlook 11
Will gas prices continue to see downside pressures over the near term from US shale production, weak global demand and rising LNG capacity? 12
European spot gas prices were weak in Q3 yet have since slightly firmed, supported by higher oil prices and healthier economic outlook 12
The price impact of weak demand has been compounded by rising supplies from unconventional sources 13
Rising US shale production has lead to a diversion of LNG to Europe and elsewhere, leaving US terminals operating at a fraction of capacity 14
Prices of spot gas and oil have decoupled, with prices of the former undercut by weaker fundamentals and lower investment inflows 15
The European supply glut has resulted in a take-or-pay contract battle, which in turn has led to further downside price risks 16
Despite the upturn in oil prices, wholesale power prices remained weak in the aftermath of the global downturn and financial crisis 17
European year ahead baseload power prices remained soft in Q3'09 18
Prompt power prices bottomed out in Q3 2009 and have since begun a moderate rise 19
Q3'09 saw year ahead gas prices continue to sink to fresh lows for the year 20
APPENDIX 21
Datamonitor European Wholesale Price Appendix 21
Q3 2009 saw year ahead gas prices continue to hit fresh lows for the year 22
Prompt gas prices continued to fall in Q3'09, aided by a ready supply of LNG 23
Peak power prices leveled off in Q3 2009, in line with the improving outlook on consumption 24
Q3 2009 saw a healthy recovery in the FTSE, and a dramatic rally in the price of crude oil 25
Despite the recession, coal contracts showed signs of stabilizing after heavy losses through 2008 26
Prompt NBP prices slid further in Q3 on the back of LNG being re-directed to Europe from Asia and the US 27
TTF followed NBP during Q3 2009, with a drop in prompt prices and flat forward prices 28
Belgian gas prices softened in line with the fundamentals at the NBP and TTF 29
In light of eroding demand, UK power prices continued to soften 30
Dutch power prices remained well below 2008 levels, despite both showing a stabilization 31
Relatively flat power prices were also evident in Belgium trading 32
French wholesale power prices found a floor 33
German power prices showed signs of leveling out 34
Definitions 35
This brief contains a number of industry standard terms 35
Methodology 36
Further reading 36
Ask the analyst 36
Datamonitor consulting 36
Disclaimer 36
List of Figures
Figure 1: After five consecutive quarters of negative growth, positive economic activity in the EU finally resumed in Q3, ending Europe's steepest downturn since WWII 2
Figure 2: Rising rates of industrial production and a pick up in exports point to a slight rebound in power and gas consumption. 3
Figure 3: Non-OECD Asia and the Middle East are forecast to comprise the greatest source of growth in energy demand once global economic activity recovers 4
Figure 4: The dollar's appeal as a funding currency has been fueled by expectations that ongoing monetary accommodation in the US will undermine strength in the currency 5
Figure 5: Despite lingering recessionary woes, equity markets have found little resistance in their rebound from multi-decade lows in Q1 6
Figure 6: The easing of credit conditions and reduced fears over counterparty risks bode well for capital investment, industrial output and the outlook on energy consumption 7
Figure 7: The marked rise in oil prices during the recession has however rekindled debate over the role of excessive speculation 8
Figure 8: Fundamentals have acted to influence prices, yet the lack of reliable and timely data in some instances has made it difficult to assess the impact 9
Figure 9: Brent forward curve on December 11th. High forward prices point to the market's positive price expectations and improved demand outlook 11
Figure 10: Gas prices continue to trade well below the elevated levels witnessed in recent years, held back by soft demand and oversupply 12
Figure 11: The shale gas revolution in the US will continue to dampen natural gas prices 13
Figure 12: Weak prices, stagnant demand and increasing shale production has led to a decline of US LNG imports in recent months 14
Figure 13: The historic correlation between gas and crude oil prices has broken down, with the former decoupling from the surging price of oil. 15
Figure 14: Both oil and power prices have been influenced by movements in the dollar and financial markets 17
Figure 15: European year ahead baseload power prices remained soft in Q3'09 18
Figure 16: Prompt power prices bottomed out in Q3 2009 and have since begun a moderate rise 19
Figure 17: Q3'09 saw year ahead gas prices continue to sink to fresh lows for the year 20

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List of Figures
Figure 1: After five consecutive quarters of negative growth, positive economic activity in the EU finally resumed in Q3, ending Europe's steepest downturn since WWII 2
Figure 2: Rising rates of industrial production and a pick up in exports point to a slight rebound in power and gas consumption. 3
Figure 3: Non-OECD Asia and the Middle East are forecast to comprise the greatest source of growth in energy demand once global economic activity recovers 4
Figure 4: The dollar's appeal as a funding currency has been fueled by expectations that ongoing monetary accommodation in the US will undermine strength in the currency 5
Figure 5: Despite lingering recessionary woes, equity markets have found little resistance in their rebound from multi-decade lows in Q1 6
Figure 6: The easing of credit conditions and reduced fears over counterparty risks bode well for capital investment, industrial output and the outlook on energy consumption 7
Figure 7: The marked rise in oil prices during the recession has however rekindled debate over the role of excessive speculation 8
Figure 8: Fundamentals have acted to influence prices, yet the lack of reliable and timely data in some instances has made it difficult to assess the impact 9
Figure 9: Brent forward curve on December 11th. High forward prices point to the market's positive price expectations and improved demand outlook 11
Figure 10: Gas prices continue to trade well below the elevated levels witnessed in recent years, held back by soft demand and oversupply 12
Figure 11: The shale gas revolution in the US will continue to dampen natural gas prices 13
Figure 12: Weak prices, stagnant demand and increasing shale production has led to a decline of US LNG imports in recent months 14
Figure 13: The historic correlation between gas and crude oil prices has broken down, with the former decoupling from the surging price of oil. 15
Figure 14: Both oil and power prices have been influenced by movements in the dollar and financial markets 17
Figure 15: European year ahead baseload power prices remained soft in Q3'09 18
Figure 16: Prompt power prices bottomed out in Q3 2009 and have since begun a moderate rise 19
Figure 17: Q3'09 saw year ahead gas prices continue to sink to fresh lows for the year 20
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