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?
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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.
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