A steadfast Bearish start to the summer trading season, a result of the colossal quarter one 2014 sell-off, has kept many market participants at ease with regards to future hedges. With complacency lingering over current pricing levels, due to the weak fundamentals governing energy prices, the market hasn’t seen such low trades in more than three years (going back to 2010) for most contracts, with some posting record lows since their inception. Could traders be taking their eyes off the ball as a result of current sentiment asks Serge Mazodila, lead trader of LG Energy Group.
Those who watch the wall… of worries What we know and what we don’t know can be regarded as the foundation of the modern-day view of market uncertainty. Although we know the current state of the physical market with regards to storage, power margins, expected demand and even weather forecasts, government decisions and the actions of political dissidents have thus far reminded the energy market of the truly unforeseeable nature of geopolitical risk. After the numerous market spikes caused by the annexation of Crimea, Ukraine’s election and most recently the sabotage attempt of a transitpipeline in Cental Ukraine, uncertainty has persisted in the form of geopolitical added risk-premia despite the current accommodative and comfortably low trading price.
The bleeding, Casterly, rock Drawing blood from a stone has always been synonymous with a near impossible task, and the trading period of summer 2014 looks set to paint such a picture for those who missed out on this year’s biggest “short” opportunity. As the cacophony of news flows leads to conflict between actual market fundamentals and trading sentiment (geopolitical risk), prices at the back end of Summer 2014 (Qtr3 2014) look set to opt for an horizontal trading trajectory whilst still carrying the underlying risk of potential of prices spikes. On the back of energy market unfriendly news, similar to the recent breakdown in gas price negotiations between Kiev and Moscow, wholesale gas and power prices in the UK could quickly revisit the highs of mid-April or further north with the latest bout of disputes ending with Russia cutting off supplies to Ukraine.
A stark reminder Surrounded by the high degree of uncertainty emitted out of the Middle-East (Iraqi crisis) and Eastern Europe (Ukraine vs Russia), a “cautiously Bearish” outlook for the UK’s energy market reflects the plethora of upside risks still present in the form of geopolitical uncertainty. LG Energy’s warning-plagued outlook aims to carefully guide the expectation of slightly lower prices in the second part of summer 2014 with a bold acknowledgement of the great upside risks, which can erupt at the drop of a hat (recent 10% weekend spikes). As a result, the need for a highly sophisticated approach to quantitatively measure end-users’ market exposure risk and the cost of the widespread complacency should be paramount, ahead of what may be another slow start to the winter of 2014. To learn more about LGE call 01253 767222 or visit www.lge-group.com