With a complacent mindset and a “steady as she goes” summer 2014 trading attitude, European energy prices have lingered near all-time lows since April due to the tamed demand levels and warm temperatures, which have cast a Bearish blanket over prices during the season.
A sideways glance at summer
The 2014 summer year-on-year increase of UK gas consumption, up almost 20%, has paved the way going into the upcoming trading winter of 2014/15, setting a precursor for future energy demand expectations, having seen an increase in natural gas usage amidst the comfortable warm temperatures.
A battle to the upside, which commenced back in July, saw energy prices (gas and electricity) rebound from record lows thanks to a technical-led buying spree that was later hijacked by a plethora of geopolitical risks relating to Eastern-Europe and the Middle-East. Already, prices have rallied quite aggressively on the back of perceived supply disruption risk, via Ukraine, leaving potential for further upside shocks to come from the cooler weather and increased demand, once winter descends.
A changing balance between risk and reward
The biggest market risk ahead now lies in the form of highly complacent summer traders who have benefited from the unusually warm winter of 2012/13.
With prices at record lows as we move into a winter trading period, on a risk/reward basis, against the impending upside risk, the associated potential downside moves in the last month of summer no longer seems appetising. As weather patterns alter, temperatures cool and demand picks up to reflect the upcoming season, prices now look more favourable to the upside moves, and the likelihood of new winter record lows seems increasingly slim.
Ahead is “A Song of Ice and Fire”
As we head into the winter trading period of 2014/15 with mounting ambiguity relating to the Middle-East (Iraqi crisis) and Eastern Europe (Ukraine vs Russia), a “Bullish” outlook for the UK’s energy market after a very comfortable summer trading season only reflects the imminent upside risk still present in the form of global market uncertainty.
LG Energy’s Bullish outlook aims to raise questions as we conclude the warm trading period of summer 2014, with a bold acknowledgement, which reiterates our previous statement that prices may brutally, and swiftly, move to the upside in the winter. 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.
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