Market commentary

October 2021

The rise in energy commodity prices reminds us of 2008. In the last week, spot and forward market prices for the next year have continued to climb to new historic highs. In Germany, the second half of 2021 is quoted at approx. 95 EUR/MWh on the power market. On HUDEX, the Hungarian ex-change important for Eastern Europe, prices are also above 110 EUR/MWh. For natural gas, we are now reading just under 45 EUR/MWh for Q4/2021 on the screens. An increase of 10 EUR/MWh com-pared to the previous month. The extreme shortage on the spot market comes from the availability of natural gas. This in turn is indirectly a consequence of the extreme demand in Asia combined with the dispute over the Nord Stream pipeline.

We thus do not believe that next year will see the same development as in 2009, when prices crashed by more than 50% compared to 2008. We see the following factors:

The oil market influences natural gas prices in Europe on the futures market. There is a lot of politics in it and we do expect a drop in oil prices next year, but it will not be as strong as 12 years ago. Since the end of June, the oil price for Q1 2022 has been moving sideways between 55 and 60 EUR/barrel (note currency and period). The expected completion of the Nord Stream pipeline should bring relief to the spot market relatively quickly if Asian demand declines at the same time. The Co-rona pandemic is also not over yet and the year-on-year increase in consumption of all types of commodities is significant in 2021, but consumption of key energy commodities is still below 2019 and supply will be expanded at these high prices.

The most significant difference between 2008/09 and the current situation, however, is the devel-opment of the CO2 price and the change in climate targets worldwide. CO2 is quoted at around 55 EUR/t and thus has a significant influence on the power price in all EU countries. From our point of view, the increase in CO2 targets from China to Europe and the USA also appears to be derivable, if we interpret the corresponding published discussions correctly. Germany, for example, is again fur-ther ahead than many others: Both the climate targets are being tightened (climate neutral as early as 2045) and the sectors affected by CO2 costs are being expanded. Thus, since the beginning of this year, space heating and road transport in Germany are now also affected by CO2 costs in the Fuel Emissions Trading Act. Similar laws in Europe are being enacted or are in preparation in many EU member states.

At the same time, we expect a better supply of natural gas imports to Europe in the coming year and a balancing of the very low natural gas storage volumes in the EU today. LNG imports in NW Europe may also increase again, as Asian natural gas prices with values below 40 EUR/WMh are more attrac-tive for exporters than Europe as a destination.

All market participants assume that prices will fall again in the next few years. The futures market quotations for next year are above the values for e.g. 2025 for power, oil and natural gas show this.

CO2 remains, in the expectation of market participants, the main reason why an extraordinary change in the energy price situation has occurred in Europe this year, some of which is permanent: coal has been replaced by natural gas in many market areas. Comparatively cheap natural gas prices and high CO2 prices have made the production of power from coal uneconomical. The natural gas price movement of the last few weeks has reversed this development. In August, coal-fired power plants in Europe are back in full operation, as the high natural gas price does not compensate for the CO2 disadvantage.

Due to the underconsumption of energy in the 1st Corona year, the surplus of CO2 certificates in the EU ETS (EU Emissions Trading Scheme) has increased further. This leads to a lower supply of allow-ances until the middle of next year. Together with the expectation of rising CO2 prices because the EU’s emission reduction targets have been sharply increased, the CO2 price should continue to rise if politicians take the targets seriously. By 2030, we in Europe now want to have 55% fewer emissions than in 1990 and the legal framework for this is now being put in place. This will lead to additional volatility in CO2 prices in the next two years, depending on which laws are now developed and how.

A decrease in the price increase on the scale of 13 years ago can only happen if CO2 prices drop massively. And that is currently not in sight if society takes the obligations arising from climate change seriously for the future. The sum of uncertainties regarding price development has reached a new high. Nevertheless, we expect a price decline in the spot market in 2022, as many price-driving factors are currently dominating, from unfavourable weather to the political tug-of-war regarding oil production quotas, the exact formulation of European climate law, or the commissioning of Nord-stream II. Some of these will disappear and the next warm winter is more likely than a cold one. Un-der these circumstances, we wish you good decisions.

For the Inercomp team
Felix Diwok