In Italy, natural gas is the predominant fuel for power generation and the marginal fuel, hence a price setter for wholesale power markets. Supply swings from variable renewables generation during the relatively productive spring period tend to greatly determine gas demand for flexible peaking plants.
Traders are flabbergasted about the plunge in demand. Uncertainty about the duration of the lockdown in Italy and its economic impact reduces the appetite among traders to take risk which reduces market liquidity. Baseload contracts for April and Q2 shed around 7% over the past two days as traders react to a freefall in industrial energy demand.
Lockdowns slash energy demand
France imposed a near-total lockdown and Spain announced its quarantine will last more than 15 days, significantly impacting electricity demand from industries and the commercial sector. REE, Spain’s transmission system operator, disclosed it had set up a third control center to add redundancy to the system during the coronavirus crisis.
Should Germany, Europe’s largest power producer and exporter, also impose quarantine on its citizens this would exacerbate the bearishness across the continent’s power market. Depth and duration of energy demand destruction are bound to severely impact utilities’ future earnings.
“China remains a market to watch for its ability to rebound from an aggressive response,” Wood Mackenzie suggests. Across Asia, low LNG prices these days challenge and partly outcompete both thermal coal power units and renewables.
Traders rush into derivatives
As economies throughout the global grind to a near-halt as government impose increasingly drastic measures to contain the Covid-19 outbreak, consumption of crude oil and natural gas plunges with the surplus stored in inventories. Traded volumes for energy futures at the derivatives marketplace CME reached a daily record of 6.8 million as traders strive to hedge their positions.
Benchmark energy products have seen trading high volumes outside of U.S. market hours, demonstrating deep liquidity and flexibility around the clock, Chicago-based CME noted. Brent crude oil prices plunged from $64 per barrel on average in 2019, with the ICE Brent frontmonth May was last seen trading as low as $25.37/bbl.