Winter 06 was offered below £58 this morning. Summer 07 was offered at £44.40. Winter 07 offered at £56.65. October 06 £44.40. These are all lows that we have not seen for several months and not seen since February of this year. So why has it all happened.

Firstly we have to look at the reason as to why it got as high as it did. In March 2006 we had emissions prices at €30/tonne, today they are at €15.50/tonne and the market is accepting that it is long and that emissions sellers although sparse have to come to the market in the next 16 months, we can safely assume that barring political intervention the system will be sold down steadily.

Secondly we have to look at fundamental fuel costs, these were very high for the first part of the year with gas prices breaking records with potential for their to be a genuine physical shortage. This Winter will be very different from last though as players have learnt from the problems and are scheduling gas deliveries much earlier. LNG shipments from the States will also start earlier and will be met this year (unlike last year).

Thirdly demand (as fas as we can predict) is unlikely to be as high as it was last year the expectation being that another unseasonally cold Winter is unlikely.

In short the system should and will be able to cope far better than last year and this is why those longs have become nervous and think that getting rid of length now makes sense. The buyers have remained patient and have tended to react far less like a herd managing exposures more carefully and looking at trading opportunities. In short we have the beginnings of a good, liquid functioning market, swayed by long term fundamentals.

SO if the oil price continues to rise, and we are led into a petro-recession then we are in a whole new world and the market does not seem to have priced this possibility in yet.