On a day when many in the industry were attending Energy Traders Live in London, the market witnessed its most volatile day of trading ever. NBP (gas) front month opened the day at 331p/therm, it then traded up to 404p/therm at 09:30 and finally closing at 266p/therm. What caused this? Limejump sees three key driving forces behind the volatile prices yesterday:
The SoLR process (Supplier of Last Resort) is used when a retail energy supplier goes bankrupt. The remaining energy suppliers bid to take over the customer book from the bankrupted supplier. When the customers are awarded to a new supplier, the volume they expect the customers to use has to be hedged from scratch. With the price cap, and in a rising wholesale market, this will be done at a loss. The delta between the price cap and the actual hedged costs can be recovered. This sees significant buyers in the market.
Price rises mean that anyone with a short position is out of the money and it is a losing trade. When the losing trade is made on margin i.e. with money that you do not actually have, your broker can call you to ask for you to deposit more money. In extreme cases they can stop out your position if you cannot meet the margin call, which adds to the momentum of the price move.
Although we saw the market react extremely bearishly to Russia’s announcement yesterday that it would increase its gas delivery to Europe, they were careful to stick to their previously stated position. Russia announced that they will continue to honour customer contracts, but there isn’t any concern regarding fulfilment of contracts coming into Europe. The markets concern regarding gas supply into Europe is based on the lack of additional supply as opposed to unfulfilled contracts. Whilst Putin did mention that there could be an increase in gas supply to Europe there was no genuine commitment to this for two main reasons. Firstly, an increase in supply will only occur if Russia get Nord Stream 2 fully commissioned. Secondly, even if this does occur, it still wouldn’t be in Russia’s best interest to increase supply to Europe from a commercial standpoint.
These comments, coupled with the upward gas move getting ahead of itself led to a large sell off ending the day roughly where we started. One thing is for sure, Limejump is always ready to help understand market movements.