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Warning: No liability for accuracy of data.
Market Comment - August 2019
In mid-February 2016, oil prices reached a low of just under USD 30/bbl, exceeded USD 83/bbl (Y+1) in summer 2018 and have now reached USD 63/bbl (Brent Month ahead). In the long term, the further orientation of oil prices towards full costs is becoming apparent, and the premium for political uncertainty from December 2018 has momentarily disappeared. The market also believes that the supply situation will become tighter in the coming months, but better again for 2020. The total number of market participants does not expect any shortage in the long term, although OPEC took measures to reduce supply in June 2019.
At the same time, rising coal prices until October 2018 (USD 95/t for Y+1) led to an increase in electricity prices on the forward market. In general it can be said that the price increase for the entire energy complex, in comparison to March 2016, has started and the absolutely low price levels for power, CO2 and gas of that time are now out of reach. In hindsight, it can be noted that the combination of factors such as favourable exchange rates, low freight costs and low energy commodity prices has led to uniquely low power prices on the futures market in 2016. The current economic environment does not allow a return to the price level of two years ago. Although coal is now quoted at around USD 70 per tonne for Y+1, the power market climbed back to its October 2018 peak in July 2019. The lower coal price compared to the autumn is more than offset by higher CO2 costs and power will soon cost 55 EUR/MWh (DE).
The oil price affects the gas (futures market) prices on the CEGH (Austria, Hungary, Slovenia, Croatia) and NCG (Germany, Czech Republic, Slovakia, Western Austria) via the oil price link on the futures market, which still exists globally. US gas prices remain unaffected by the oil price. Gas storage volumes in Europe at the end of July 2019 are so good on a year-on-year rate, that no shortage can be derived and the gas spot price now quotes at 10 EUR/MWh on some days. 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 gas prices, the fuel switch (coal to gas) is becoming more relevant and we expect an increased use of gas in electricity generation in the future. In November 2018, the sharp rise in the price of CO2 in the previous year raised the price point for CO2, at which the switch from coal to gas was to take place, to over EUR 40 per tonne of CO2. This figure is now declining rapidly and we expect power prices to be increasingly oriented towards the "Clean Spark Spread", partly due to Germany's announced withdrawal from coal. These are the costs of generating power with gas-fired power plants, taking the CO2 price into account.
Despite the high power prices (approx. 54 EUR/MWh for the front year), the contribution margins of the coal-fired power plants did not increase significantly. The CO2 price is approaching the 30 EUR/t mark and gas now has an advantage over coal on the spot market. In the UK, for example, this has long been the reality. This leads to higher power prices than in Central Europe.
Until October 2018, LNG prices were so attractive 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 August 2019, gas in Asia (LNG) is trading at around 14 EUR/MWh and we therefore expect LNG to be fed into the European grid for a longer period of time. However, Asian gas prices are now beginning to become more attractive for LNG suppliers than Europe and we expect slightly rising spot prices for gas.
Even if renewables continue to be on the rise, in the medium term they cannot represent a complete replacement for coal-fired or nuclear power plants, which will be continuously shut down 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, as power will increasingly replace oil and gas and also provide heat and mobility for households. Gas from Europe's own production is declining, so the need for imports is increasing by itself.
After a severe drop of CO2 prices to below 5 EUR/t in spring 2017, the demand for emission rights has also increased with the legal certainty for the 4th allocation period. Prices currently range between EUR 25 and EUR 28 /t. How things will continue will be determined by politicians, from Brexit up to the German Coal Commission. However, we expect slightly falling prices; 20 EUR/t is also possible. The question here is whether it will rather happen in 2020 or 2026.
In general, we do not expect all energy commodities (electricity, oil, coal, CO2 and gas) to decline to their lows of H1 2016, but neither do we expect them to rise significantly above the October 2018 levels . At the same time, the high volatility of spot market prices for electricity and gas will only slowly decrease. 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 electricity and gas. Also Fridays for Future will have a long-term impact. In the medium term, i.e. next year, we expect a decline in the prices of forward market contracts, as the spot markets are at historically low levels and economic policy does not exactly convey confidence and security. Unless CO2 is becoming more important.
For your Inercomp Team