Market Insight: Long-Term

Oil prices ended April at the $22/bbl mark, and the steady recovery has continued throughout May with the front-month product currently changing hands at just over $34/bbl. The recovery has come as more nations ease lockdown measures and demand begins to recover, particularly in far-Eastern economies. Figures also indicate that production cuts, agreed by OPEC+ over Easter, are being adhered to. Oil has lost some ground in recent days as US crude stocks posted a significant, and unexpected, weekly build.

Carbon prices have gained ground from rising oil and strengthened equity markets. As with oil, a steady recovery has been observed throughout May with carbon now sitting comfortably above the €21/tCO2e mark. This of course increases the cost of generation for fossil fuel fired power stations and ultimately this cost is reflected on energy markets.

Market Outlook

The outlook for the coming weeks is neutral. In the shorter-term, rising temperatures, expected seasonal drops in demand and a healthy renewable outlook paint a bearish prompt picture for June. Norwegian flows are also expected to remain steady throughout the month. Short term price spikes are possible, such as those seen this week, should the renewable outlook change or demand for cooling increase.

Further ahead, there are mixed signals for oil. Demand is expected to continue to recover, with the IEA already forecasting that 2020 demand may not be as deeply impacted as originally thought at the beginning of the virus outbreak. The market is still clearly vulnerable to bearish drivers, such as further US stock builds and rising tensions between the US and China. OPEC+ is due to meet in mid-June, it is thought Russia may be less keen to extend cuts so market participants are eagerly anticipating the outcome of talks.

UK gas and power markets are still sitting at extremely favourable levels and so clients are advised to consider renewals. With the markets currently showing contango characteristics, prices further out being more expensive than nearer-term prices, we would advise that clients consider either Fixed contracts of 24 months or less or adopt a longer-term Flexible strategy at this time.