This year saw unprecedented volatility in all the commodities markets. Most of this volatility was led by the oil market which seemed to be heavily influenced by a combination of fundamental drivers and financial hedge funds tinkering with markets which they seemingly failed to understand.

At the start of the year the market continued to rise from the lows seen in Sept 07. Oil crept momentarily below $100/brl and some players predicted that the market had risen too high too quickly and that selling opportunities would prevail. This moment did not last long, as a combination of low oil supply and with financial players ploughing into oil, it rapidly smashed through the $100 mark and quickly marched on to $120+/brl. This started to seriously affect long term gas prices and European prices, with carbon also starting to pick up speed. Many fundamental players believed that the market was looking over bought and the affects of a recession appeared to be being ignored as the market continued its rise.

The financial markets started to receive a battering as Bear Stearns, and Lehman Bros’ financial clout suffered. This only prompted hedge funds to buy up oil with market moves of $10 in a day not unheard of. This hedge fund froth, started to worry oil majors who made announcements to state that oil should not be this high and it was only when in July oil prices reached $147 up $17 in three days, that the market started to take stock. Most predicted that oil would fall but settle around $100/brl. Power prices were also starting to decouple from gas and power with the LCPD (Large Combustion Plant Directive) limiting the amount of physical generation in the market. An complex array of possible running regimes, meant that the power market was being squeezed as some coal plant opted to fit environmental kit. The failed return of 2GW of nuclear plant did not help and the day ahead price rose dramatically, as a result. A series of physical issues affected the market with a demand control call (managed brown out) in July.

Q4 08 took a very different turn as oil continued to fall dramatically, a final squeeze in the market meant that power prices remained high for the month of November, but as the market took stock of the fundamentals, the fall in power and gas prices started to realign itself with oil prices.