A defining year for energy markets

2021 will be remembered as a defining year for energy markets, with unprecedented price volatility and record high energy prices in Q4.

A number of factors contributed to the surge in prices: world economies recovered faster than expected from Covid-19 lockdowns at the beginning of the year, and a cold and long winter stretched all the way into April, driving up demand for energy. At the same time, we saw significantly lower gas storage levels compared to 2020, unplanned outages, low wind production in September, political unrest and underperforming deliveries of natural gas from Russia.

We saw the effect of these market drivers at the end of the year. For example, TTF gas prices were at 19 EUR/MWh in January, peaking at 182 EUR/MWh in December. German day-ahead power prices started the year at 54 EUR/MWh and peaked at 428 EUR/MWh. EUAs started the year at 34 EUR/t and peaked close to 89 EUR/t in December. Similar developments could be seen across commodities and across markets worldwide.

For market participants, the extreme volatility and soaring energy prices increased risk and put immense pressure on liquidity. I am proud to say that Danske Commodities managed to navigate safely through the extreme market conditions and helped bring balance and liquidity to challenged energy markets.

Strong results with Equinor as a catalyst

By combining our broad market access and agile business model with the financial strength and commercial opportunities that come from being part of energy major Equinor, we delivered record adjusted EBIT of EUR 272 million for 2021, up from EUR 44 million in 2020. Adjusted gross profit for the year was EUR 345 million, up from EUR 97 million in 2020, and driven by our scalable platform, we produced a record gross turnover of EUR 32 billion. Equity grew by 94% to EUR 649 million which, together with significant credit facility from Equinor, proves the robustness of our company.

The results for 2021 firmly underline the strength of the cooperation between Danske Commodities and Equinor. Since becoming part of Equinor, we have scaled up our business, and I am proud to say that adjusted EBIT for 2021 constituted more than half of the acquisition price in 2019.

People like no other

Our results are also a testament to the expertise and dedication of the people at Danske Commodities. Reading through the DC Annual, you will meet some of them – from the Treasury team that ensured we had the liquidity to keep our trading engines running, to the tech-driven traders working closely with quantitative analysts and software developers to master the new reality of the increasingly complex markets. Extraordinary efforts have been made across the company and this year, we really saw the value of our diverse skill sets and vast industry experience, as we navigated unprecedented market volatility.

Outlook: volatile market conditions to continue

Looking ahead, we expect the volatile market situation of 2021 to continue in 2022, with significant political unrest as a main driver of energy prices. On a more positive note, we also expect to see a continuation of the heavy investments in renewable energy and new technological solutions within the renewables space as the world takes further steps towards a sustainable energy future. Backed by Equinor, Danske Commodities remains well-positioned to perform our role of bringing liquidity and balance to global energy markets.

Full annual reports

Danske Commodities Group
Danske Commodities US

Wind turbines and solar panels are the most dominant renewable energy sources, and once installed they produce cheap, carbon-free power. Exactly what the world needs to reach the Paris Agreement’s goal of keeping global warming well below 2 degrees Celsius.

However, energy generation from wind and solar is highly dependent on the weather, and with the exception of hydro reservoirs in countries like Norway and Sweden, there is no efficient way of storing electricity in large quantities. At least not yet. To ensure a stable supply of power, we need a flexible energy source that can be put to use when the sun doesn’t shine and the wind doesn’t blow. As of now, this flexibility is only offered through conventional energy sources such as coal, oil, nuclear and gas.

The preferred source of flexibility

Out of these options, gas is the preferred source of flexibility for two main reasons: it releases less carbon when burned than oil and coal, and when needed, it can be ramped up and down much faster than coal and nuclear, making it more suitable as a supplement to the intermittent energy generation from wind and solar.

All over the world, governments are setting ambitious climate targets, and coal and nuclear power plants are being decommissioned to be replaced by renewable energy. As the influx of renewables in our energy system grows, so does the volatility of the energy production and the need for gas as a flexible asset. The rise in gas prices in 2021 underlined this point, because it was largely driven by a combination of increasing energy demand, lower-than-expected supply of natural gas and weather events like long, cold winters and periods of low wind.

New technologies are needed

The interdependency of renewables and flexibility from natural gas will continue in the coming years, and Europe will most likely need to diversify the sourcing of natural gas and invest in gas infrastructure side-by-side with investments in renewable energy sources. At the same time, we must also invest in new technologies such as batteries and hydrogen, which may be the long-term solution to the challenges of intermittent energy generation.

About Mikkel Holm Jensen

• Position: Quantitative Gas Trader
• Employed since: September 2019
• Educational background: Master’s in Finance

Intraday power markets are changing rapidly. Driven by national climate targets, Europe is seeing an influx of renewables, and the short-term physical power market is key to succeeding with the transition to sustainable energy. Why? Because this is where renewable energy is integrated in the energy mix. But integrating renewables in a physical market is no easy task.

More renewables means more volatility

Renewable energy is a highly volatile commodity, simply because we cannot control when the wind blows and the sun shines. When conventional energy production is being phased out and we start to rely more on renewables, market volatility will inevitably increase. Forecasting capabilities and a data-driven trading approach become key and for traders, this means having a full overview of European markets, price data, weather forecasts and much more. Actually, to stay on top of the volatile intraday markets, a trader would have to use hundreds of screens to respond immediately to each market movement. This is just not possible, which is why we have upskilled our traders to handle the new market reality and future-proof their skills.

Meet the tech-driven trader

Intraday markets are not only becoming more volatile. They are also growing in terms of liquidity at high speed, which means many, many more trades. Our traders are now executing thousands of trades each day and to manage that, we are evolving into tech-driven trader hybrids, working shoulder-to-shoulder with quants and software developers, who have also become indispensable on the trading floor. As an example, we have built skills in SQL coding so we can fetch the data ourselves. We have also learned to code in Python and make reports using PowerBI. Ultimately, this means that the traders can now solve complex analytical tasks themselves, which boosts trading results and future-proofs the skills of the traders in a digital world.

Algos are a trader’s best friend

Some of the most powerful weapons available to the tech-driven trader are automated trading solutions. We spotted early on that intraday trading was becoming a volumes game and to stay competitive, it would mean doing more trades and making less mistakes. Enter the trader’s best friend: algos. Algos have made it possible for us to reduce manual errors, eliminate repetitive tasks and free up time for our traders to hone their analytical skills and devise profitable trading strategies. Today, around 75% of our intraday trades are handled by algos, which has enabled our traders to grow the business. In just a year, we more than doubled our monthly traded volumes – and according to EPEX, we are now the second-largest intraday trader by volume.

About Anders Kring

• Position: Head of Intraday Power Trading
• Employed since: July 2018
• Educational background: Master’s in Finance

In Q4 2021, liquidity came under immense pressure from rapidly increasing energy prices and extreme daily price fluctuations across markets and commodities. To keep the trading engine running without limiting trading strategies, our Treasury team had to increase liquidity and quickly move significant funds from our accounts to clearing banks and counterparties as security.

Equinor as a catalyst for strong performance

During these extreme market conditions, we benefitted greatly from being part of energy major Equinor. When Equinor acquired Danske Commodities in 2019, one of the main arguments for the acquisition was the ability to combine the agile trading engine and vast market presence of Danske Commodities with Equinor’s financial muscle. During 2021, we clearly saw the value of these complementary strengths.

Danske Commodities’ first response to the increasing prices in the beginning of October was to launch a range of initiatives such as rearranging guarantees to optimally support daily clearing requests, raise parent company guarantees, increase guarantee lines with our banks and ensure optimal use of existing trading lines. However, it soon became clear that we were in a situation unlike anything we had experienced before and over the following months, we extended our credit facility with Equinor to a total of EUR 2.4 billion.

Prepared for high volatility scenarios

In markets with extreme volatility, especially the variation margin will put pressure on a company’s liquidity. When trading bilaterally or through an exchange, a company may need to provide security for any price fluctuations that may arise during the period from the time an agreement is signed until the deal is executed – in case the deal falls through. With high fluctuations, the sum needed to provide security naturally also increases substantially. High volatility also meant that it was difficult to optimise liquidity, as large sums were transferred back and forth to clearing banks due to the margin requirements.

Following a year that has firmly underlined the rationale behind Danske Commodities becoming part of Equinor, we have now fully become part of Equinor’s cash pool, making it easier to transfer money back and forth between the two companies. This makes us even more prepared for big within-day liquidity swings.

About Helle Fiskbæk Andreasen

• Position: Head of Treasury
• Employed since: May 2017
• Educational background: Master’s in Economics