What makes up the price of energy consumed by Irish businesses every day? How do Bord Gáis Energy traders assess the energy markets?

As part of the trading team in Bord Gáis Energy, the Gas Desk is responsible for ensuring there is a sufficient supply of gas to meet the daily needs of all our customers, from one bed apartments to gas fired power stations.

Energy is one of the most unpredictable supplies in the world and energy pricing is very complex. The price of diesel and petrol tends to move in line with oil prices and currency movements, while Irish power prices are directly influenced by UK gas prices and exchange rates, as well as geopolitical factors, transport and distribution costs and taxes and charges, To ensure a competitive and steady price for our customers, gas is purchased on the forward market, also known as ‘hedging’.

Energy markets have changed dramatically over the years, but they remain very unpredictable; just look at the changes in oil prices. Brent crude oil had been trading at $100 for three years but began to fall in 2014, eventually hitting $27 in January of this year. Since then prices have recovered to $50. This sort of price action is not unusual for commodity markets when you consider the fundamental factors such as weather, supply, demand, storage and infrastructure issues feeding into prices.

When reading market news reports, we often see references to ‘sentiment’. This is how the market, or collective attitude of traders, feels at a point in time. Typically they are “bullish” when they see prices going up in the future or they are “bearish” when they see prices falling.

The view in the UK gas market for much of 2015 was that fundamentals were bearish. Demand was steady, while supplies were increasing due to expected growth in Australian and US exports.  Prices fell over 30% last year and price volatility, a gauge of market nervousness, fell accordingly. Market sentiment was bearish.

gas prices

       Gas prices July 2015 – July 2016

However, by the end of April 2016 sentiment in the gas market changed. Cooler weather in the UK, some supply outages and a more positive view on oil prices shifted sentiment from bearish to bullish. The fundamental view of the market did not change much but the sentiment of traders and market participants moved quickly. The impact on UK gas prices was dramatic with prices rising 20% to fresh 2016 highs in the space of two weeks.

For businesses that are trying to decide on whether to buy their energy requirements on a short-term basis or fixing their energy requirements over a one or two year period, the increased volatility in the market in recent months illustrates how important this decision can be.

The Bord Gáis Energy Index is a useful tool for gaining a better understanding of how energy markets are performing and what is driving prices. It’s a monthly index which tracks the price performance of the main energy components in Ireland. Visit our website bordgaisenergy.ie/energyindex for more details.

 

Written by David Grainger, Gas Trading Manager, as part of the Understanding Energy blog series.