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Price volatility is quite possibly one of the most important things to think about when mulling over when to sign your next energy contract. No one can predict how high or low prices will go. Yes, they will undoubtedly come down at some point, but no one can say by how much or by when, or most importantly for how long. The market hasn’t seen such volatility in decades.
The volatility isn’t just down to the war in Ukraine. Even before Putin sanctioned the devastating invasion, OFGEM released the following statement ‘‚Ä¶the volatility of gas and power prices has been generally increasing in recent years. In Q4 2021, volatility for electricity increased 56 percentage points up to 127%, and gas increased 71 percentage points up to 140% from the previous quarter.’
Now of course, volatility is off the scale and we think will continue to be so, for some time to come. Price increases of up to 30% in a single day are not uncommon. Price points that we previously thought would never be broken, have been. A year ago, we heard people talking about 3.5ppkWh for gas being high, but now the same people are saying 10ppkWh is “okay”. The unit rate price extremes, now being reached, means all bets are off.
As the supply dynamics change and Europe reduces its reliance on Russian fuels, more customers will be buying from fewer suppliers, at least in the short term. Using the usual rules of supply and demand, if supply decreases and demand stays the same there will be upward pressure on prices. If then, there is at some point a risk to those remaining supplies, we should expect prices to spike further still. Market prices are, and will continue to be, susceptible to the slightest change in dynamics.
We should not assume that prices will revert to the levels we saw last year anytime soon. Forward curve prices for the next 12 months look relatively static and perhaps 8p-10ppkWh for Gas and 25p-30ppkWh for electricity is the new norm. The truth is, we simply don’t know.
What we do know is that European countries are looking to increase their gas volumes held in storage before Winter 2022. The volumes needed to achieve these levels will more than likely keep gas prices high throughout summer and onwards. To compound matters, if weather patterns of last year are repeated, we might not get the energy we expect from wind and warm weather in Asia will take LNG supplies away from us. All in all, there is not much comfort on the short-term horizon.
If you would like to know more about the drivers affecting prices, please talk to us. We are only a phone call away and want to help.
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