2006 as a electricity year proved to be an interesting game of two halves. The first half saw record oil prices, a continued buying interest in all commodities, and a feeling that the highs were only  stepping stones before the markets continued to increase.

To put these types of numbers into perspective:

Emissions €31/tonne

Oil (Brent Crude) fwd month $72/brl

Electricity Win 06 baseload £72/MWh

Electricity Win 07 baseload £66/MWh

Gas Q1 07 93p/therm

Some of the fundamental cuases of this record rise, was due to fundamental supply which looked very weak. Demand did not seem to be abating and with wars in Iraq and Nicaragua oil rose, forcing sellers of gas to be scarce. Furthermore, in March Rough the main gas storage facility in the UK had a fire and knocked gas injection and withdrawl facilities out for most of the remainder of Q1 06 and the beginning of Summer 06. This fear caused many of the buyers to run to cover themselves for further catastrophes.

In May 2006 we saw the results of the first years emissions scheme and it was clear that there was massive over supply and the emissions price in the space of three days collpased from €30 to €8 finding a new level shortly afterwards at €15. In June the start of some early selling pressure occurred on the back of Rough allowing limited injections into the storage facility. It became apparent that the market would be able to store gas for Winter 2006. Interestingly, many fundamentalists started to look at gas supplies coming into the UK for Winter 06 and with two new interconnectors looking to go live in early Q4 06 it was apparent that the amount of gas flowing into the UK would take supply level significantly above the demand levels in a very cold Winter. People predicted that if it had been a mild winter then we could see some quite low gas prices. This was exemplified when Langeled injected some test gas into the system and the gas went negative. Suddenly day ahead prices were trading below Summer prices and the forward price looked very high indeed. Sellers became dominant and anyone long was very wrong.

Emissions prices traded sporadically below €5

Oil prices traded below €60/brl something not seen for a couple of years

Win 07 baseload fell to below £40 on the last trading day of the year and Q1 07 gas also closed welll below 35p/therm.

Day ahead prices for December average out at low £30 and storage facilities for gas were never used despite being completely full.

Bears continue to dominate the market and it is clear that 2007 is going to be very interesting and likely to play some reversal of fortune to 2006. With a perhaps a small rise in 2007 followed by further falls in the Summer 07. Convergence of Summer and Winter 07 prices suggest that some power plant will be inoperable at these levels and do not be suprised if a competition enquiry is launched against the suppliers who will purposefully intend to be slow in the way they reduce prices.