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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 ‘…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.

DISCLAIMER
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