Market Volatility: What Does It Mean For Prices?

The past two weeks has seen prices in the market spike up to £41/MWh. But what does this volatility mean for businesses? Matt Osborne and Dorian Lucas give their views on what is driving power prices and Robin Preston offers his advice on what it means for businesses.

Focus on fundamentals

Matt Osborne, Principal Risk Manager, explains:

“Uncertainty over Brexit has caused Sterling to fall against the Dollar and the Euro, making respective energy imports more expensive. The cost of oil has also pushed up prices: increased short covering and speculative activity has pushed Brent oil up by around 60% compared to recent lows of $27, with many participants now targeting $50/bbl on the upside.

“Cooler temperatures have driven up gas demand whilst power generation has tightened due to lower wind output and nuclear outages. All these fundamental factors have caused the spikes seen this week in the market.

“Whilst the long term outlook remains bearish, the price volatility is likely to prevail in the short term and businesses should continue to monitor market fundamentals closely.”

The technical take on the market 

Looking at technical analysis of the market also gives some insight into how prices are moving and reinforces that short term bullish movements are paired with more bearish long term prices. Dorian Lucas, energy trader, explains:

“We have seen some prolonged upward movement of Crude oil prices since they hit historic contract lows in January. Whilst much of this was initially linked to potential changes oil production levels, a series of strong bullish technical levels have been breached.

“Fibonacci retracement levels give some insight into how the market is moving (these show a measure of resistance used in technical market analysis to gauge movements – typically once a level has been reached, price increases would slow).  The Fibinacci levels have been breached over the past fortnight (moving swiftly past 23.6% & 38.2%), with prices rapidly closing on the 50% retracement level.

“Further to this we have seen another bullish indicator in the form of a ‘Golden Cross’. This indicates when prices climb above the crossing of a short term average and a long term average.”

“Looking at power prices, we have seen a much stronger upward move over the short term, with prices surging through a series of key Fibonacci retracement levels.

“However, we believe that prices could correct lower. 95% of intra-day price action stays within the upper and lower price bands (Bollinger bands). Recent prices have breached the upper Bollinger band, which suggests that prices could correct lower over the short term, limiting further rapid upward potential.”

What does it mean for businesses?

These spikes demonstrate the importance of a well-defined risk management strategy. We have enjoyed a sustained period of falling prices but, as ever, complacency is a dangerous approach to commodity costs! Despite long team bearish fundamentals, short term spikes and volatility is always a possibility and buying at the wrong time can be a costly error.

This is particularly important when it comes to fixed price contracts. Fixed price offers can expire within a couple of days, particularly in volatile markets.

Robin Preston, Sales Director, advises:

“Whether prices go up or down, businesses need to protect themselves from the upside of the market and have the ability to track the market down rather than being held to the mercy of a knee jerk reaction.

“Risk management is the absolute key: managing the type of contract, the outcome and the price be it flexible, variable or fixed – for commodity and non-commodity costs.

“My advice is to engage with experts who can advise on the best option for you and your business.”

Time for action

If you are not in a risk managed strategy or have not already signed into a fixed price then your business is essentially exposed to both the recent spike and future spikes.

Inenco’s energy traders will be tracking the market closely and sharing insights each day in our market reports and our risk managers are on hand to provide advice on the best way for your business to handle the short term volatility and optimise your purchasing decisions.

Email asktheanalyst@inenco.com with any market questions or call 08451 46 36 26 to discuss how Inenco can help your business secure the best commodity costs.

Matthew Osborne – Principal Risk Manager, Dorian Lucas – Energy Trader and Robin Preston – Sales Director at Inenco Group