Market commentary

April 2020

The crude oil prices seemed to bottom out in mid February 2016 at around 30 USD/bbl. In summer 2018 the prices exceeded 83 USD/bbl (Y+1) and currently crude oil reached 64 USD/bbl (Brent Month Ahead). On the long run, a stronger orientation of the oil price on full costs can be assumed. The risk premium for political instability from December 2018 disappeared for the time being. In general the market believes in an even better supply situation in 2020. This assumption is confirmed by the economic forecast which is rather week. This of course means a restricted consumption. Although in June 2019 the OPEC took measures to reduce the offer, most market participants expect no scarcity of crude oil.

At the same time, the rise in coal prices until October 2018 (95 USD/t for Y+1) led to an increase in power prices on the forward market. The current conditions do not permit a return to the power price level of two years ago. At the beginning of December coal quoted for Y+1 at approx. 60 USD/t, which is as low as in December 2016. The power market (in Germany) fell in the course of August from its peak level by approx. 14% to 43 EUR/MWh. However, it is now at the lower end of the price range that we have been ob-serving since October 2018. The lower coal price compared to autumn 2018 is still offset by higher CO2 costs. The CO2 price quotes around 25 EUR/t. We do not see any major changes in any direction for CO2.

The oil price affects, the gas (forward) market prices on the CEGH (Austria, Hungary, Slovenia, Croatia) and NCG (Germany, Czech Republic, Slovakia, Western Austria) and TTF (Benelux) via the gas-oil price correlation. At the beginning of December 2019, gas storage volumes in Europe reached historic highs. Thus no shortage is at sight! Spot prices below 15 EUR/MWh (expectation for Q1 2020) are a sign of gas oversupply. Denmark’s approval of the construction of Nord Stream 2 at the beginning of November has greatly reduced the risk of a supply bottleneck in 2020, even though still no agreement has been reached with Ukraine (Naftogaz).

At the same time, LNG is available abundantly. Since coal prices are higher than gas prices, fuel switch (coal to gas) is becoming more relevant. Hence, we expect an increased use of gas in power generation in the future. Prices in the UK show us a gas price-dominated power market and the resulting higher prices for power. Electricity for the front year costs approx. 3 EUR/MWh more in the UK than in Germany.

Power generation from gas-fired power plants therefore leads to higher electricity prices. Yet, in view of the extremely good gas supply, we do not expect this to happen in 2020. In any case, the CO2 price will remain decisive for power prices and gas demand. Despite MSR (Market Stability Reserve of the CO2 trading system) – a decline of CO2 prices is possible. Should consumption weaken (weather, economy), the owners of emission rights will rather be inclined to sell them. “Buy and hold” as a management strategy will then no longer pay off.

In 2019 LNG gained importance in Europe. Up to 20 % of the required quantities came from tankers. But since November 2019, gas in Asia (LNG) has been trading at approx. 17.5 EUR/MWh and thus the end of the very high LNG feed-in into the European network has come. The full storage facilities in Europe will further increase the price gap to the Asian market. The effect of the US threats against Russia concerning the Nord Stream 2 pipeline or because of the Ukrainian transit contracts is becoming increasingly unlikely.

Even if more and more renewable power generation plants are being built, in the medium term they cannot represent a complete replacement for coal-fired or nuclear power plants. Those will be continuously disconnected from the grid over the next few years and currently provide the secured capacity at relatively low costs At the same time, power and gas consumption is expected to rise further in the future. Electricity will increasingly replace oil and gas and provide additional heat and mobility for households. Gas from domestic production is declining in Europe; hence, the import rate will continue to rise by itself at 5-10% per year.

After a sharp drop in CO2 prices in spring 2017 to less than 5 EUR/t, demand for emission rights has also risen with the legal certainty for the 4th allocation period. Prices currently range between EUR 23 and EUR 28 per tonne. How things will continue on the CO2 market determines politics: Some question marks remain like the Brexit or the German Coal Commission. A strong EU Com-mission with a focus on climate protection can make a significant difference and some renowned forecasts point to prices of just under 40 EUR/t for the year 2021.

Prices for all energy raw materials (power, oil, coal and gas) have fallen sharply year-on-year. A further downward movement for gas and power is only possible on the futures market. At the same time, the high volatility of the spot market prices for power and gas is only slowly decreasing. The exit from coal as well as the implementation of the EU emission directives and the “Clean Energy Package” will be decisive for the further price development of electricity and gas. Fridays for Future” will also have a long-term impact. The spot markets for gas and power are at historically low levels. Economic policy is not sending any bullish signals either. In Europe, however, CO2 could lead to price extremes in electricity prices, which are only marginally related to pure fuel costs. In terms of energy price formation, the development of the cost for CO2-emissions is the most difficult factor to estimate. Yet, simultaneously the most relevant one for power and gas.

For the INERCOMP Team
Felix Diwok