Market commentary

September 2020

In many ways, the months in lockdown made energy prices history. The global convergence of gas prices this summer was one of them. Whether at the US Henry Hub, on the European mainland or on the LNG spot market in Asia, gas cost virtually the same in all major centres of consumption.

Consequently, the economic viability of many LNG producers was undermined, as short-term production costs including transport were higher than the attainable sales prices. LNG deliveries were consequently cancelled and conventional pipeline flows were reduced. As a result, gas prices in Europe have returned relatively quickly to the level of short-term marginal costs, which currently stand at around 10 EUR/MWh. We consider this leap in the spot market to be sustainable, but the next upward trend should not start before the first cold weather period.

In a broader context, gas transport is also in the headlines at present. Nordstream 2, which was originally called a purely commercial project, is now a political heavyweight. Europe’s security of supply is not dependent on it in the medium term, transit via Ukraine is becoming all the more relevant. Also the availability of US LNG. A prankster who thinks evil.

With the low oil prices, gas production in the USA has fallen by about 10% in the meantime. The USA has now been replaced by Russia as the largest oil producer. The Rig Count, however, indicates that the more profitable production sites are coming back from the price level of 40-45 USD/bbl. Since global oil consumption is still far from normal, undersupply and rising prices are not expected before the second half of 2021.

The most interesting “energy source”, in terms of the “Hottest Commodity”, will certainly remain CO2. Fundamental data suggests that the market is oversupplied due to reduced emissions. Nevertheless, buying interest remains high and the target of 30 EUR/t has already been scratched several times. The clear political will in Europe to shape the energy turnaround by pricing CO2 is also reflected in the German national CO2 tax. The price outside the EU ETS for CO2 emissions is to rise from EUR 25/t in 2021 to EUR 55/t by 2025. This is reason enough for speculative traders to increase their positions.

This price influence therefore remains the main factor affecting the European power exchanges in the case of fossil fuels, which are still extremely cheap. On the spot market, the gas spot price increases the marginal costs of gas-fired power plants by an additional 10 EUR/MWh compared to the beginning of August.

In principle, the main focus in the coming months will be on economic recovery, but the outlook for early medical responses to the pandemic already gives the markets hope.

With oil under pressure as the lead currency, we also see downward potential for fossil fuels in september – but the lowest prices on the futures market should not be endangered.

Under these circumstances, we wish you good decisions and are happy to be available as a sparring partner.

For the team of Inercomp

Manuel Giselbrecht