Market Dynamics Report

NOVEMBER 21 2012

October 2012

Welcome to the first of a monthly series of blog posts. These will serve to highlight the market composition and price changes we observe in our markets and provide some insight into what the future may hold.

Volumes are up in all markets, while the largest gas markets move towards exchanges

October saw an increase in activity in our markets, with volumes up in every market analysed vs. September. It was also a strong month for the exchanges.

Looking at gas first and the key market of NBP: October saw the highest month since March 2012, with volumes up MoM, YoY and YTD. Exchange executions1 increased share to the highest month on record with broker clearing also increasing market share.

In TTF, while broker clearing and exchange executions also had strong months, broker bilateral2 share had its lowest share since we began recording volumes. Even with the drop in market share, broker bilateral still recorded its 3rd highest volume month since we began recording, behind January and February 2012.

Broker bilateral continues to hold the majority of the market in both NCG and Gaspool. NCG did give away a small amount of broker bilateral share however to exchange execution.

Another event of note in the UK Gas markets this month saw Ofgem announce that it is cancelling the obligation for gas traders to have a gas shipper's license from January 1st 2013. This could be construed as the removal of a barrier to entry to trade in the UK gas markets. We will monitor volumes closely in early 2013 to identify what impact, if any, this announcement will have.

The power markets behaved contrary to the gas markets this month, with broker bilateral market share increasing in UK Power, German Power and French Power.

The underlying theme in the key coal markets of API2 and API4 was one of recovery. Broker bilateral recovered market share from broker cleared3. In API4, we saw broker bilateral market share bounce back this month. This was a recovery from September 2012 which saw the lowest share of broker bilateral since August 2011.

Coal is the only market included in this month's analysis where the Swaps to Futures event, and Dodd-Frank regulation, may be expected to impact, due to the global nature of trading in the commodity. To date we have not seen evidence that there has been a shift of swaps to futures for API2 or API4, while we have seen a small amount of block future activity on exchange. We'll keep an eye on developments here as we head towards the end of the year, when the full impact of the regulation will be evident.

EUA and CER market share moved in opposite directions this month. EUA's saw exchange executions increase primarily at the expense of broker cleared, while CER's saw the opposite, broker cleared increased share. Prices continued to fall this month in both EUA's and CER's, with CER's dropping below €2. This month saw Italy throw its support behind the EU commission's plan to delay the sale of 1.2 billion carbon permits in the coming years. This is intended to halt the decline in EUA prices which has undermined the effectiveness of the scheme to date.

As ever in our markets, there are interesting times ahead.

1 Exchange Execution
Total volume executed directly on exchange and cleared with the relevant clearinghouse
2 Broker Bilatera
Total volume executed at a broker and cleared bilaterally, without the involvement of a clearinghouse
3 Broker Cleared
Total volume executed at a broker and given up for clearing to a clearinghouse
Cleared Market
Total volume cleared at a clearinghouse