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Warning: No liability for accuracy of data.
Market Comment - October 2019
In mid-February 2016, oil prices reached a low of just under USD 30/bbl, exceeded USD 83/bbl (Y+1) in the summer of 2018 and have now reached USD 56/bbl (Brent Month Ahead). In the long term, the prerelevant gearing of oil prices to full costs is becoming apparent and the premium for political uncertainty from December 2018 has briefly disappeared. The market also believes that the supply situation will improve even further in 2020. This will be strengthened by the currently increasing concerns about the development of consumption, as economic growth is globally seen as weaker. Most market participants now do not expect a shortage of oil, although OPEC took measures to reduce supply in June 2019 and continues to react.
At the same time, the rise of coal prices until October 2018 (95 USD/t for Y+1) led to an increase of power prices on the futures market. In general, it is safe to say that the low power, CO2 and gas prices of 2016 are now out of reach. In retrospect, it can be seen that the combination of factors such as favourable exchange rates, low freight costs and low energy commodity prices has led to uniquely low electricity prices on the futures market in 2016. The current conditions do not permit a return to this power price level of two years ago. Coal is quoted for Y+1 at approx. 67 USD/t at the beginning of October. Although the power market (Germany) fell by approx. 12% from its peak level in August to 46 EUR/MWh, it still remains within the range of prices that we have been observing since October 2018. The lower coal price compared to autumn 2018 will continue to be offset by higher CO2 costs. However, compared to the previous month, we expect a further decline of the cost of emission rights.
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 on the forward market. At the beginning of October 2019, gas storage volumes in Europe were at historically unseen heights. Shortages are thus out of sight and spot prices below 10 EUR/MWh are a sign of this gas oversupply. The shortage in the spot market in 2018 has also contributed to LNG being available in abundance in Europe and Asia. Due to the high coal prices compared to the gas price, the fuel switch (coal to gas) is becoming more relevant and we expect an increased use of gas in power generation in the future as well. Prices in the UK show us a gas price dominated power market and as an outcome higher electricity prices. Power for the front year costs approx. 3 EUR/MWh more in the UK than in Germany.
Electricity production from gas-fired power plants therefore generally leads to higher electricity prices. However, the CO2 price will remain a decisive factor for power prices and gas demand. And there is now - despite MSR (Market Stability Reserve) - a decrease possible. Should consumption weaken (weather, economy), the owners of emission rights will be more inclined to sell them. "Buy and hold" as a management strategy will then no longer pay off.
Until October 2018, LNG prices were so competitive for sellers on the Asian market that LNG had no significance for Europe. This has changed considerably since then and LNG was imported into Europe at record levels until the beginning of July. For October 2019, gas in Asia (LNG) is trading at approximately 17 EUR/MWh and thus the end of the very high LNG feed-in into the European grid has come. The full storage facilities in Europe will increase the price gap to the Asian market again. This is until America will make its threats against Russia come true by taking action against the Nord Stream 2 pipeline or because of the Ukrainian transit contracts. What will happen in that case is hard to predict.
Even if renewable power plants continue to be expanded, in the medium term they cannot represent a complete replacement for coal-fired or nuclear power plants, which will be decommissioned continuously over the next few years and today provide the secured capacity at relatively low costs. At the same time, the power and gas consumption is expected to rise further in the future, as power will increasingly replace oil and gas and provide additional heat and mobility in households. Gas from its own production is declining in Europe, so import demand will continue to rise by itself at 5-10% per year.
After a severe drop of CO2 prices to below 5 EUR/t in spring 2017, the 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 this continues will be determined by politicians, from Brexit up to the German Coal Commission. However, we expect prices to fall slightly; prices below 20 EUR/t are also possible. The question here is whether it will rather happen in 2020 or 2026.
In general, we expect a decline for all energy raw materials (electricity, oil, coal, CO2 and gas). However, not to the lows of H1 2016. The values of the previous year seem just as unrealistically high. At the same time, high volatility of spot market prices for power and gas is only slowly diminishing. The exit from the coal market as well as the implementation of the EU emission guidelines and the "Clean Energy Package" will be decisive for the further price development of power and gas. Fridays for Future" will also have a long-term impact. In the medium term, i.e. in the coming months, we expect a decline in the prices of forward market contracts, as the spot markets are trading at historically low levels and economic policy does not exactly convey confidence and security. In Europe, CO2 could lead to extreme power prices that are only marginally related to pure fuel costs. The development of the cost of CO2 emissions is the most difficult variable to estimate for energy price formation.
For your Inercomp Team