Market Insight: Long-Term

Oil prices continued to recover throughout December as COVID-19 vaccination programs began globally and OPEC+ agreed to extend production cuts into January. A weaker USD has also supported oil prices by increasing buying interest. The recovery has been capped by the spread of a new strain of COVID-19, leading to tougher lockdowns for many countries. Some market participants speculate that oil demand won’t recover to prepandemic levels until at least 2022. OPEC+ will meet again today to discuss extending current production cuts into February in light of the new demand concerns. If agreed, further cuts would support oil prices.

Carbon prices remain supported with the current auction pause and cold European temperatures. Auctions are currently on hold until late January/early February as adjustments are made to the scheme following the UK’s exit. A continued cold snap across Europe is also contributing to higher permit prices as countries rely more heavily on fossil fuel fired generation to keep up with demand.

Market Outlook

The shorter term outlook is bullish with temperatures set to remain at or below norms for at least the first half of January, whilst the temperature impacts of the SSW event, and resultant PV displacement, could take weeks to play out. The supply picture is strained as LNG cargos continue to favour Asian destinations. MRS in UK and Europe currently sits well below levels in January 2020. Further ahead, the picture is neutral to bullish. The commodity complex has strengthened on vaccine development and production cuts, however, the new strain of COVID-19 is renewing concerns around oil demand recovery.

Backwardation is now in full play across gas and power markets.. Fixed clients should consider the opportunity backwardation could present for securing volume further ahead. Alternatively, clients should select a longer-term flexible strategy to take advantage of any emerging opportunities to secure volume further ahead.