November Monthly Market Insight

Cooler weather supports prompt prices, whilst rising commodity complex supports the curve.

Market Insight: Short-Term

Demand has continued to rise throughout November with the arrival of colder weather and shorter days. High pressure systems dominated the weather picture through November which, along with cooler weather, reduced wind generation output for the first half of the month. This pressured prompt contracts, particularly on power. The outlook for the coming weeks is on the cooler side, with temperatures expected to average around 1°C below norms.

The gas supply picture has been healthy throughout November with strong flows from both Norwegian fields and the UKCS. Potential disruption from Norwegian strike action threatened to reduce flows later last week, however, the action was resolved on Sunday. LNG supply has continued to improve throughout November. US LNG exports remain strong, on the weaker USD, with cargos also arriving from Russia and Nigeria. The flurry of arrivals looks to continue into early December as 4 LNG cargos will arrive by the 7th. Medium range gas storage levels currently sit at similar levels to 2019, however, with cooler weather forecast for December, we could soon begin making a more significant dent in the reserves.

Market Insight: Long-Term

Oil has undergone a significant recovery throughout November to end the month over 27% up on month. Early in the month, the toughing of many national lockdowns, pressured oil, however, as news of several potential vaccines emerged, we saw prices gradually start to climb. Further upside was provided by the market’s anticipation of extended OPEC+ production cuts, from January to March 2021. The commodity was knocked off highs in excess of $48.50/bbl, last week, as news emerged of errors within the trial of AstraZeneca’s vaccine.

Carbon prices have also posted significant gains on month with the commodity initially finding strength from rising oil markets and a more positive global economic outlook. A pause in auction supply from mid-December, along with cold European weather forecasts, have further supported prices. EU ETS auctions will cease whilst adjustments are made to the scheme, including those needed following the UK’s exit and it is thought auctions will only resume in late January.

Market Outlook

In the shorter term, the outlook is bullish with temperatures set to remain at or below norms for at least the first half of December. The LNG picture continues to look strong, but concern around the sustainability of this remain as Asian hub prices strengthen and a cool second half of winter is expected in the far East. Further ahead, the picture is also bullish. The commodity complex has strengthened throughout November and vaccine updates, along with the expected 3-month extension to OPEC cuts, should keep prices supported.

Backwardation has emerged on seasonal power contracts, with the contango on gas contracts continuing to soften. Fixed clients should consider the opportunity backwardation could present for securing volume further ahead. Alternatively, clients should select a longer-term flexible strategy to take advantage of any emerging opportunities to secure volume further ahead.

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