Market Dynamics Report

MAY 14 2014

April 2014

Volumes decline in most main Euro Gas and Power markets, major commodities exchange increases share of the cleared coal markets and UK Power market sees highest volumes since March 2011.

Volumes and prices are down in almost all of the key European Gas markets in April 2014, despite the continued tensions in Ukraine, which we saw had an impact on prices and volumes during March. NBP saw volumes fall vs. March to their lowest levels of 2014 to date. TTF also saw a decline in volumes vs. March to the lowest levels of the year so far. Despite these declines, both NBP and TTF volumes are still significantly higher than 2013 YTD. The exchanges had strong months in these markets. What is driving increased exchange executed volumes relative to the brokers in April? Front month prices fell in NBP and in TTF vs. March. If the political situation in Ukraine is still unresolved by the end of the summer will we see a spike in Gas prices?

Most of the main European Power markets saw volumes fall sharply in April, with German Power seeing the steepest month on month falls. German Power has seen less volume YTD in 2014 vs. 2013. Broker bilateral volumes have fallen, while exchanges have seen their volumes increase YTD, as the cleared share of the market increases. French Power also saw volumes fall vs. March, however YTD French Power volumes are up vs. 2013. Currently the French Power market is majority broker bilaterally traded. Will the burgeoning French Power market mirror German Power and see a shift towards clearing over 2014? UK Power volumes were in stark contrast to the other Euro Power markets this month, and are discussed in greater detail below.

In our three years of covering euro energy markets we have a first – from a market dynamics perspective UK power is a hot topic.  So we reviewed it in detail this month.

Why the fuss?  Well, the UK Power market registered its highest volumes this month since March 2011, when the disaster at the Fukushima nuclear power plant in Japan caused a spike in European Energy volumes across the board.   So, outside exceptional external events, this marks a high for this market since our records began 3 years ago.

Volumes were up April vs. March 2014 and up YTD vs. 2013. The catalyst for bucking the market trend is clear as OFGEM initiated some structural changes as to how this market trades.  March 31st 2014 saw the introduction of twice daily mandatory market making windows for the six main participants in the UK Power market. These participants must post bid and ask order pairs into the UK Power market across the curve during 2 x 1 hour windows from 10.30-11.30 and 15.30-16.30 UK time, with the objective being to boost liquidity in the UK Power market. The increased volumes in April, especially when viewed in the context of declining volumes in many of the European Energy markets, indicates that this initiative has been successful thus far. Total broker bilateral volumes in April 2014 were significantly higher than the same month last year.  In terms of market dynamics, UK Power was almost all broker bilaterally traded, with a tiny amount of volume given up for clearing and no futures volume this month. Some felt this initiative could trigger a shift in where UK power trades.  Exchanges invested in their solutions and their positioning in the market either to complement with brokers with clearing or to compete on execution.  However, the market has grown under the incumbent OTC bilateral category.  The big question is whether clearing will grow or not and how many new trading participants will enter the market, wherever it is traded.  We will continue to monitor this market closely over the coming months.

Turning to Coal, API2 saw volumes increase this month vs. March, while API4 volumes declined vs. last month. One major commodities exchange continued to increase its share in both API2 and API4. Coal has been fascinating to analyse in the last 12 months as the two incumbent major exchange groups  compete for share in an increasingly cleared market, and this looks set to continue throughout 2014 as another major exchange re-focuses on this space.