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Market commentary

June 2020

“We should take the coronavirus seriously, but we should not be afraid,” was the summed up statement of western politicians in early March. What is now happening on the energy markets is almost only a side effect of the global pandemic. Prices for power and gas in Western Europe were already under severe pressure before the corona measures. However, the reason for this was the very mild winter and the gas oversupply carried over from the previous year and the very favourable conditions for renewables.

An example: Electricity was traded in Germany in February at slightly over 21 EUR/MWh. Gas remains clearly below 10 EUR/MWh in the spot throughout Europe. All this is the consequence of the oversupply, combined with the significant drop in demand in response to the corona virus, which is between 5% and 22% for electricity in the EU member states. Gas consumption also declined in absolute terms, although gas-fired power plants are currently more economical than coal-fired power plants.

The price of oil, the global lead currency for energy commodities, may not be heading towards the USD 20/bbl mark after all. Next year, the oil market will cost around 35 USD/bbl (Brent), indicating the expectation that everything will take longer than was believed a month ago.

The current price trend on the futures markets: Political influence on the financial markets, alternating with the publication of pandemic news, continues to influence sentiment and expectations. After all, fundamentally, the energy markets remain on the ground and we are seeing the lowest spot market prices in almost all countries in Europe since the beginning of liberalisation (1999). At present, it is easiest to track the stock market indices and, analogously, to observe the bets (= forward market prices) on the energy commodity markets. Corona keeps us under control. The financial markets were at their lowest point in the second half of March, then rose again. In mid-May, the financial world also realised that things were not improving quickly. This is also reflected in the energy futures market prices for next year, which are now falling again. The markets in Eastern Europe, which are linked to the HUPX, will not be able to maintain their comparatively high level either. Probably.

Do you know Asterix? There is a ” Gaulish village ” among the energy raw materials that is fighting against the fall in prices: the price of CO2 emissions. After a sharp drop in CO2 prices in spring 2017 to below 5 EUR/t, the demand for emission rights has increased with the legal certainty for the 4th allocation period. The regulations introduced in the 3rd allocation period will prevent a crash in prices comparable to gas or electricity. From the previous year’s level, 25 EUR/t, prices fell briefly to just over 15 EUR/t, but on 6th April the “Gauls” hit back and the price reached almost 20 EUR/t. The Market Stability Reserve, which skims the surplus certificates, will strike (the magic potion of CO2 trading, so to speak). Market participants therefore expect prices to rise again. Currently, they range between EUR 18-20/t. But who knows what other side effects the magic potion and the publication of the benchmarks will have for the industry. Currently, the CO2 price is also showing signs of fatigue and the intake of the magic potion is showing its first side effects at the beginning of May.
The prices for all energy raw materials (electricity, oil, coal and gas) have fallen sharply year-on-year. Further down, the movement of gas and electricity on the futures market is more possible again, as last month brought price gains. The corona virus could, however, continue to throw all expectations overboard, and a continuation of the pandemic could cause prices, which are now showing delicate signs of recovery, to plummet again. This seems to be looming in the middle of May.
Stay healthy, we wish you, as far as possible, a pleasant time and your company “We’re open for business”.

For the Inercomp team
Felix Diwok

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