Oil prices defied expectations at the back end of last year by falling despite the increased risk of violent escalation in the Middle East and production cuts brought into place by OPEC. Much of this was driven by short-term market speculation, with some large players selling the market short to turn a quick profit. Eventually, fundamental forces will always win out (this is as true when markets fall as when they spike) and this is what we are seeing now, with the balance of production against global consumption now tightening. This shift in direction can be expected to continue as the market rebalances and OPEC members consider further production cuts. However, a steep rise seems unlikely whilst global economic growth remains sluggish and US crude oil inventories stay strong.

Gas prices fell to their lowest for over two years in February, but have since started to recover on suggestions that the market had become 'oversold'. The market is well supplied with LNG and storage levels are high for the time of year, but as with oil, there is a sense that price falls have outrun the true fundamentals. Chinese demand for LNG is up year-on-year and there is some risk of this gathering more momentum, although the market doesn't seem to be overly concerned. In addition, we have an extended outage in the US's largest LNG terminal in Freeport, Texas following a fire last year. If this continues it will start to weigh more heavily on sentiment for winter prices as we move through the year. None of these things are huge risk factors, but certainly warrant keeping a close eye on.

Electricity prices mostly take their lead from gas due to the continued high proportion of gas-fired generation in the UK. Other factors have an influence, though, including carbon prices (which directly affect wholesale power) and the impact of increasing (but variable) renewable generation. Over the past six months, UK carbon prices de-linked and dropped compared to the EU market, despite the announcement of plans to cut allowances to the lowest-ever levels. Since January, this has stabilised and is now trending gently upwards (albeit well below the levels seen a year ago). The carbon market is notoriously volatile, but some limited further increases are expected. On the positive side, the French nuclear fleet has performed well over the winter following several years of serious outages. This is positive for the UK market because it generally supplies any shortfall via the interconnector - the power can now flow back the other way, helping to limit the risk of price spikes.