Markets Fall as US-Iran Framework Peace Deal Boosts Confidence

Market Update:
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On Sunday we had the news of a framework peace deal between the U.S. and Iran to end the conflict
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Whilst there’s an agreement in place (Memorandum of Understanding), albeit with limited details known at this present time to end the war and open the Strait of Hormuz, it’s not yet been signed, which would explain why prices have not taken a massive dive. It appears that further negotiations around Tehran’s nuclear program still remain! The Strait of Hormuz is only expected to be “open” once the agreement has been signed on Friday, so shipping remains halted until then.

Overall, geopolitics should give the bearish sentiment some more tailwind. More details on the agreements or ship movement, possibly dependent on mine clearing, would be positive signs as we await final signature later this week.
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The deal also appears to fall short of many of the goals outlined in the early days of the conflict.
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• Iran’s theocratic government, which Trump urged Iranians to overthrow at the outset of the conflict, remains largely intact, and leaders who replaced those killed in joint U.S.-Israeli strikes appear even more hardline.
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• Also unmet are his earlier demands that Iran dismantle its ballistic missile program and stop support for regional proxies. Even so, a U.S. official told reporters that the preliminary deal accomplishes Trump’s core objectives.
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For now, it looks like we need to:
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1) Keep an eye on what happens once the U.S. markets open later today and how their sentiment to the news impacts markets.
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2) See what happens after Friday’s signing.
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While wholesale prices have softened significantly this morning, they are not as low as interim points over the past 3 months and a half months.
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It was once said “A week is a long time in politics” these next few days could certainly prove this. Cautious optimism is the order of the day.

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NATURAL GAS:
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In the UK, this morning the NBP front-month contract is trading at 104.4p/th at time of writing, a sharp decrease of 7.44p/th when compared to yesterday’s closing NBP front-month price of 111.9p/th. This is largely the result of a combination of the deescalation of tensions in the Middle East along with the outlook of stronger wind generation.
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A constant supporter of gas prices has been the ongoing tensions in the Middle East. This support has been reduced overnight as the US signalled it would not pursue further escalation in the region. This has eased concerns and prompted traders to unwind part of the geopolitical risk premium helping to soften prices.
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Another key bearish driver has been the outlook for stronger wind generation across the UK. Forecasts indicate renewable output will increase significantly from Friday onwards, reducing the need for gas-fired power generation and pushing gas further out of the generation stack. As a result, demand expectations from the power sector have weakened, placing downward pressure on prompt gas contracts and contributing to losses across the front end of the curve.
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While front of curve has seen major softening in prices, further out on the curve, contracts remained comparatively resilient. While the immediate geopolitical outlook appears less supportive, ongoing uncertainty surrounding Middle East energy infrastructure and LNG supply routes continues to provide some support to longer-dated contracts.
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Overall, today's bearish movement in the market has been driven primarily by weaker demand expectations linked to stronger wind generation and a reduction in geopolitical risk premiums. These factors resulted in significant bearish movement across the front end of the UK gas curve.

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ELECTRICITY:
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In the UK and across Europe, power prices moved lower today as easing geopolitical concerns and stronger renewable generation forecasts helped soften prices.
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One of the significant bearish drivers has been the de-escalation of tensions in the Middle East. Following indications that the US would not pursue further military escalation in the region, the geopolitical risk premium that had supported prices earlier in the week has been softened. As gas markets weakened in response, power contracts followed suit, with lower fuel costs feeding through into wholesale electricity prices across Europe.
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Weather forecasts have provided additional downward pressure. Expectations for stronger wind generation across the UK and Northwest Europe are set to reduce reliance on thermal generation over the coming days. Increased renewable output is expected to displace gas-fired generation within the power stack, weakening demand for conventional generation and weighing on prompt and near-curve power contracts.
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Overall, stronger wind forecasts and the easing of geopolitical tensions have been the key drivers behind today's decline in European power prices.

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