Stockholm (HedgeNordic) – Shepherd Energy Portfolio, the managed account from Shepherd Energy AB which trades actively on the Nordic energy markets, steamed further ahead with October returns of 4.72%, bringing its YTD returns to 14.95% . This is by comparison to basically static October on the Nordic Hedge Fund Composite of -0.01%.
Shepherd Energy Portfolio’s management seeks absolute returns and projects profits on both upturns and downturns in the electricity market. The fund’s management is value-oriented and seeks favourable risk/reward in the medium term by being positioned according to fundamental price changes, with the weather being the most important basic parameter.
In a comment to the month’s performance, Arne Österlind (pictured), one of the fund’s Portfolio Managers, explains that the Nordic electricity market had been characterized during the spring and summer of 2016 by the very little snow during the previous winter, leading to a weak drainage of reservoirs and giving producers good control of the price situation. The weather has since continued along a dry track, with continuing high-pressure blockages across the North that created large energy deficits in Norway and Sweden.
The deficit of the current level compared to average levels is a full 25 TWh, which is comparable to the energy amount produced by four average-sized nuclear power plants for the duration of a year. Sweden’s reservoirs are now approaching their lowest level since 1960, says Mr Österlind. Reservoirs are thus approaching critical mass for the upcoming winter, particularly if the coming winter will be as cold as in 2010 and 2011. The need for imports from continental Europe to the Nordics has increased, but price levels on the continent have also risen sharply in the past months. Electricity prices have risen partly due to the cost of producing electricity from coal-fired power, which in turn has risen considerably with the soaring price of coal. This is partly due to the constraints of Chinese coal production which has close to doubled the price of coal for 2017, and partly because of the considerable halt in French nuclear power production due to on-going investigations at EDF.
There will therefore be an unusual number of reactors out of service during the winter, which has caused French electricity prices to rally. France is now trading around 90 EUR /MWh, by comparison to the level for the Nordic countries, which is at around 40 EUR /MWh, according to Mr Österlind. Shepherd Energy Portfolio therefore judges that there is still significantly more upside potential on the Nordic electricity market if there is no radical improvement of the energy situation.
From the summer onwards, it has been a clear call for the portfolio to trade on the electricity market on the long side, first and foremost to find upside for the coming winter. The trend, however, is erratic and difficult to follow because of a high degree of uncertainty and at times large recoils. For this reason management often works with different types of spreads, between different maturities in the Nordic market and between the Nordic electricity market and the German market, which is not driven as much by weather as electricity prices in the Nordic countries are. The fund’s yield of nearly 15% through October this year, says Mr Österlind, corresponds well with the portfolio’s target of a net yield of 10-15% per annum with limited risk.