Commodities markets have been going wild this year, especially in energy. Supply shortages and huge swings in prices have been wrong-footing even traders who should know exactly what to expect. Take European power (electricity) markets. On Monday, German futures for power delivery in 2023 – the European benchmark contract – hit a record €1,050 per MWh. As prices soared, Austria’s Wien Energie – the power utility for Vienna – was in trouble: it was said to be seeking a €6bn bail-out to meet margin requirements on its trading positions. By Wednesday, power futures had collapsed to €635, and Wien Energie’s crisis had passed.
It no longer need any funding, it said – although it admitted that situation could change within days or weeks. If you’re confused about how a firm whose business should be generating or buying power and distributing to users could end up in such a financially unstable position, you’re not alone: the Austrian authorities are also probing exactly what trades the firm was making. Some Austrian media outlets have reported that it was long natural gas futures and short power futures, effectively betting that the gap between the cost of generating and the price received for selling power – known as the “spark spread” – would narrow. But this has not been confirmed and the firm has denied that it was engaged in speculative trades.
Unpredictable markets
Volatility like this means investors are paying more attention to commodity markets than they have for at least a decade. However, the question most want to answer is pretty simple: what the shape of futures curves – ie, the chart of prices for delivery in successive months – tells us about how traders expect prices to change. If a curve is in backwardation, does that tell us that oil or gas prices are likely to be lower next year?
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Unfortunately, probably not. Certainly, a situation in which prices for spot (immediate) delivery are much higher tells you that the market is tight. In some commodities, almost all supply is on long-term contracts, or has been committed ahead and only a very small percentage trades on the spot market. Spot prices can be pushed up a long way if there’s even a modest amount of extra demand by buyers who really need it.
However, this kind of analysis doesn’t seem to work further down the curve. In theory, futures prices are a prediction of what spot prices will be at a certain date, but in practice, research suggests this doesn’t hold true (other than at extreme highs and lows). Even in the short term, commodity markets are hugely complex and volatile, as Wien Energie’s roller-coaster ride shows. And in the medium term, producers may ramp up and down output in response to high or low prices, affecting future supply. There are too many moving parts for today’s prices to predict the future.
-
Steve Webb: The triple lock is there to do a job. I’m not embarrassed or ashamed of itThe triple lock means 13 million pensioners will now get an above-inflation state pension boost in April. While the rising cost of the policy has stirred controversy, Steve Webb, who served as pensions minister when it was introduced, argues the triple lock is vital and should stay. Webb speaks to Kalpana Fitzpatrick on the new episode of MoneyWeek Talks – out now.
-
How retirement pots risk running out 11 years early if inflation remains highPension savers could find their retirement income may not last as long as they anticipated over fears that inflation may not slow down
-
Chen Zhi: the kingpin of a global conspiracyChen Zhi appeared to be a business prodigy investing in everything from real estate to airlines. Prosecutors allege he is the head of something more sinister
-
Canada will be a winner in this new era of deglobalisation and populismGreg Eckel, portfolio manager at Canadian General Investments, selects three Canadian stocks
-
Jim O’Neill on nearly 25 years of the BRICSJim O’Neill, who coined the acronym BRICS in 2001, tells MoneyWeek how the group is progressing
-
Circle sets a new gold standard for cryptocurrenciesCryptocurrencies have existed in a kind of financial Wild West. No longer – they are entering the mainstream, and US-listed Circle is ideally placed to benefit
-
8 of the best converted industrial properties for saleThe best converted industrial properties for sale – from a Victorian railway station in Norfolk to a Grade II-listed former water tower with views of the River Alde
-
More clouds gather over renewable energy trusts – is there any hope for the sector?The outlook for renewable energy trusts has gone from bad to worse this year, with the industry being caught in a 'perfect storm'
-
Should ISA investors be forced to hold UK shares?The UK government would like ISA investors to hold more UK stocks – but many of us are already overexposed
-
Why Scotland's proposed government bonds are a terrible investmentOpinion Politicians in Scotland pushing for “kilts” think it will strengthen the case for independence and boost financial credibility. It's more likely to backfire
