Even in the heat, Winter 06 was the focus on Monday. After 4 months offline, the Rough gas storage facility returned triggering a fall in the Winter 06 contract by just over £1MWh. Whilst the return of the facility had been announced in recent weeks, there has been enough uncertainty to factor in the £1 risk premium.

Further out, Winter 07 itself is trading at a discount to 06 and 08. The discount to 06 is the belief that there will be greater supplies in the UK in 07 particularly gas supplies and so the fundamental fuel price on the marginal plant will have decreased in comparison to 06. In a perfect market players would look to store gas at 07 prices and use this in 08 but storage facilities are limited and so in reality this option is reduced. Winter 08 prices are higher than 07 due to the cost of emissions, which are trading at €5-€6 premium between phases due to more stringent NAP’s (National Allocation Plans) in Phase II.

The smart trade looks to wait for emissions prices in 07 to fall (something which if 05 verification is anything to go by is quite likely). It will drag Phase II prices with it taking the cost of Winter 08 with it. This will be the opportunity to hedge.