The Futures Market: Understanding the Market

When you sign onto an energy contract, you’re agreeing to buy an amount of energy over a given time period. The supplier you’re buying the energy from won’t have the storage to buy it all then and there to gradually supply it to you. So, the energy supplier will buy your energy on the futures market.

A future is a type of contract agreement in which you’ll agree to buy a commodity or security at a set future date. For this case, it’s a commodity. The futures market essentially shows what people predict the price of the commodity to be at a given point in the future. The futures markets that we’re interested in are Gas and Electricity. These spiked new records in August 2022, however, this has been causing problems for suppliers for a few years now.

Futures market is used to buy and sell commodities in the future. We use the futures market to predict whether the retail price will go up and down. This helps us to ensure that our customers are getting the best possible deal when they’re signing their contracts.

Your supplier can’t store all the energy now, so they’ll agree to buy it at a certain price at a later date. Therefore, suppliers use it to guarantee a price for the energy they are buying for their customers.

Many suppliers assumed that prices would fall so signed energy contracts without buying the energy in advance. This then caused many suppliers to go bust when prices began to rise in the tail end of 2021.

The Futures Market will usually change when information changes or new details come to light. For example, if there’s suddenly a prediction of a cold snap in two months’ time, prices will rise now – not when the cold weather arrives two months later. The market reacts to perfect knowledge. When new information is available, the market will change, and prices will either go up or down.

Small changes in supply can cause large effects on the futures market. Prices are based on average temperature, but if when we get to that point, the weather is warmer than average, prices will drop. This is because the demand will be less.

International politics also has the power to change the Futures Market. Since the conflict in Ukraine began, Russia’s exports of gas have fallen dramatic with some pipelines stopping transferring any LNG at all. This drove market prices up drastically with the futures markets for gas and electricity spiking in around August 2022, hitting an all-time high.

Russia’s supplies have remained low but prices for gas and electricity have continued to fall over the last few months. This is due to a lower than average demand for gas this winter as we experienced higher temperatures across Europe. This has allowed Europe’s underground gas storage to reach record levels for this time of year, remaining nearly above the 20% average. This lower demand has been coupled with the continued high supply of LNG from multiple sources, such as the US and Qatar. While prices are dropping, they’re still around 200% higher than pre-energy crisis. This is due to the still fragile energy supplies along with the price of delivering LNG being higher than pipeline gas. This has all caused prices to go up as suppliers must charge higher rates.

There’s currently concerns that demand in China will be 9-14% higher in 2023 than the previous year. There’s also fears over supply in the winter of 2023/24 which has caused the current futures to become more expensive throughout the year.