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Warning: No liability for accuracy of data.
Market Commentary - February 2018
The crude oil prices seemed to bottom out at the beginning of 2016 and have started an upward movement, with intermediary downturns. The price moved between 53 and 62 USD/bbl in the second half of 2017, despite the better than expected discipline of OPEC members to cap the oil production. Now, after the last OPEC meeting with further production output cut, we see the prices at 60 USD/bbl and we read about the extreme dominant political influence in the daily news.
Natural gas in Europe is priced higher than at the beginning of last year. However, electricity prices have seen a further sharp upward move in January 2018 after the steady increase of coal wholesale prices in 2017. From February 2016 onwards the energy commodity prices have started to rise gradually and the past price spike in October 2018 showed that the market participants are more than ready to buy as they seem to believe that the downward trend has reversed permantently.
Lower crude oil prices put downward pressure in the first half of 2018 on European continental gas hubs like CEGH (Austria, Hungary and Slovenia) and NCG (Germany), as pricing formulas of major gas importers to Europe are still linked to oil prices via the LNG detour. From May 2018 onwards the prices went up and peaked in October at 24 EUR/MWh for Cal 20. Together with the oil pirce price and abundant LNG supplies in February 2019, prices now have come down to 20 EUR/MWh at most continental European Hubs.
The fuel switch between coal and gas has become more interesting, but it did not materialize as CO2 has pushed the demand for gas and therefore the gas prices.
Electricity prices have left the all-time lows far behind (2016) and show higher volatility recently, which is caused by CO2 and political uncertainty and weather extremes. The main reason for the upwards trend has been the rising coal price, which was driven (besides others) by the icreased demand of South-East-Asia and the appreciation of currencies in producing countries. And as hard coal power plants are the marginal power plants in Germany’s electricity market merit order curve, higher coal market prices result in higher electricity prices and give the gas price in the European hubs a reason for further increases.
However, power production from renewable power plants has reached more than 40% of the power demand of Germany (Frauenhofer, 2019). A new production record in 2019 could put further pressure on the EEX spot-market prices, but this expectation will be counterbalanced during the next 5 years as the nuclear (and coal) phase-out could outpace the development of new renewable power capacities.
All in all, we see stronger weather dependencies for energy prices in Europe than 2 years ago and observe a trend of market price distortion by market operation design, as national and EU wide regulation influences market prices for power and gas. We believe that the low in prices of February 2016 for the long term market (Cal 2020 or longer) will not be reached again as the transformation of the power market away from fossile fuels will cut production capacity.
We should not forget the consequences of the prolongation of the Emission Trading Scheme (ETS) for CO2: There is a long term impact on the CO2 market price: It dropped sharply in spring 2017 due to missing binding goals for the emission reduction. In the meantime, CO2 became a game changer. The price trippled since February 2017 and has reached 24 EUR/t in Summer and December 2018. It is clearly an important source of volatiltity for the power prices in Europe. The present price level of 46-49 EUR/MWh for next year's delivery could prevail for the period till March 2019, especially as the spot market prices are lower than expected 2 month agoe. Then, we will get a new and clear signal form the CO2 markte. Brexit will be over and the compliance period for 2018 too.
For your Inercomp Team