Monthly Price Brief - A Review of European Gas and Power Price Trends: May 2008

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.

Report Highlights
The Dutch TTF spread is narrowing as the NBP's premium value is eroded over time.

Oil prices saw a meteoritic rise as geopolitics skewed the fundamentals.

Near-end baseload prices dipped in May due to bearish power trading on the Month-Ahead contract.
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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
The Dutch TTF spread is narrowing as the NBP's premium value is eroded over time 2
A consistently narrow differential over time characterizes the NBP and Zeebrugge gas markets 3
The close proximity of the UK and Belgian gas hubs has given little scope for arbitrage 4
The NBP contract spreads show the range and depth in trading both spot and forward products 5
Seasonal summer contracts show a propensity for narrow spreads over time 6
Short-run supply-side factors are not responding quickly enough to the market's demands 7
Oil market fundamentals are dynamic, with supply-side effects difficult to model accurately 8
Oil price inflation has been phenomenal and continues to super-peak 9
The long-term consolidation of oil prices is not good news for consumers or producers, as inflation is set to continue 10
Oil price expectations of supply have pushed up the futures curve, revealing the change in sentiment and market outlook 11
Spreads between products change over time and reflect the nature of demand-pull factors, such as the driving season in the US 12
Spreads between products change over time and reflect the nature of demand-pull factors, such as the driving season in the US 13
Inventories and stocks for gasoline products will be a key factor as the driving season starts in the US 14
Inventories and stocks for gasoline products will be a key factor as the driving season starts in the US 15
A closer inspection of oil prices, in historical context, reveals the magnitude of the 2007/08 spike 16
A closer inspection of oil prices, in historical context, reveals the magnitude of the 2007/08 spike 17
Reserves data shows a decline in overall world production, however, peak oil theory is a highly unlikely outcome 18
Consumption patterns show a gradual rise that will not worry forecasters and supply-side analysts 19
Production and consumption woes will diminish through the course of 2008/09 20
Near-end baseload prices dipped in May due to bearish power trading on the Month-Ahead contract 21
As Belgian Month-Ahead prices fell, most other contracts firmed going further out on the curve 22
French power prices climbed higher through April, with the exception of Month-Ahead prices 23
German baseload power curves firmed going out and fell at the near end 24
Dutch power prices firmed, particularly on the Quarter-Ahead contract 25
UK baseload power prices firmed, with Month-Ahead peaking 26
Bullish gas contracts continued to firm across Europe 27
Gas contracts at the NBP are close to reaching long-term highs 28
Holland's TTF gas market replicated the bullish sentiment currently prevailing in European markets 29
Tightness and market sentiment firmed prices at Zeebrugge 30
APPENDIX 31
This brief builds upon Datamonitor's extensive pricing proposition 31
Glossary 32
This brief contains a number of industry standard terms 32
Our analysis builds on other sources to provide greater insight 34
Further Reading 34
Extended Methodology 34
We assess the profitability of fossil fuel plants across northwest Europe 34
Our bespoke services can be tailored to your specific needs 35
Ask the analyst 35
Datamonitor consulting 35
Disclaimer 35
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Figure 1: UK-Dutch spreads illustrate the dynamics of cross-border trade over the last 12 months, and the narrowing price differentials 2
Figure 2: Spot and forward price spreads are virtually non-existent between the NBP and Zeebrugge 3
Figure 3: Comparatively, the geographic proximity of Bacton and Zeebrugge provides price symmetry 4
Figure 4: Minimum/maximum spreads between 2004 and 2008 illustrate a broad range of speculation 5
Figure 5: A comparison of minimum and maximum spreads between 2004 and 2008 is given below 6
Figure 6: At present, oil supply is not adjusting quickly enough to changes in demand, due to its inelastic nature and production constraints 7
Figure 7: The dynamics and decomposition of supply and demand have become opaque and difficult to estimate 8
Figure 8: Oil prices are breaking records with soaring prices that look set to continue during the second half of 2008 9
Figure 9: Forecasters have adjusted the future price of oil as the recent surge in prices has caused a significant realignment of prices going out 10
Figure 10: Both the Nymex and ICE crude oil forward curves illustrate a major shift in sentiment as production speculation is high 11
Figure 11: Brent crude oil is at a premium to WTI crude oil 12
Figure 12: Over time, crude oil spreads look set to meander and grow as Brent and WTI part 13
Figure 13: Total stocks for both oil and petroleum products are in reasonable shape 14
Figure 14: Gasoline stocks will be challenged through 2008's peak demand in driving season 15
Figure 15: The short-term picture highlights the fact that 50% of observations lie below $80/barrel 16
Figure 16: In comparison to the short-term view, the long-term median value is around $20/barrel 17
Figure 17: Reserves point towards a gradual decline in line with Indo-China economic growth and weaker-than-forecast global demand 18
Figure 18: Tracking global oil consumption illustrates that although we have seen a growth in demand 19
Figure 19: The changing nature of the core demand and supply fundamentals leads to uncertainty, volatility and speculative trading 20
Figure 20: Near-end baseload prices dipped in May due to bearish power trading on the Month-Ahead contract 21
Figure 21: In the month to May, all Belgian baseload power prices firmed, except Month-Ahead contracts, which softened 22
Figure 22: French baseload prices took a slight dip at the near end, despite significant firming further out 23
Figure 23: The outlook in Germany was in line with the rest of Europe, with near-end prices falling and longer-term strips firming 24
Figure 24: The Dutch market showed the lowest levels of swing in comparison to its European neighbors 25
Figure 25: Indifferent to European power market movements, prices firmed on the Month-Ahead in the UK, as well as on contracts going further out 26
Figure 26: Bullish gas contracts continued to firm across Europe 27
Figure 27: Contracts rose across the board at the NBP as bullish sentiment reacted to both the oil price and European gas prices 28
Figure 28: Dutch gas prices firmed, continuing the pattern since Q4 2007 of gas prices having a high degree of dependency on the oil price 29
Figure 29: Zeebrugge gas prices shadowed the NBP and TTF, eliminating the opportunity to arbitrage and illustrating the prevailing uncertainty 30
Figure 30: Energy pricing proposition 31
Figure 31: Generation spread methodology 34
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