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Market Commentary - July 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 we see the prices at 80 USD/bbl and we read about the extreme dominant political influence in the daily news.

Natural gas in Europe is priced higher than 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 January 2018 showed that the market participants are more than ready to buy as they seem to believe that the downward trend has reversed.

Lower crude oil prices put downward pressure in the first half of February 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.  So we cannot expect falling prices on the European gas hubs at the moment. We do think, that the prices will not show last year's lows again, as storage demand will remain higher, as weather projections show an increased demand till end of Summer. Meanwhile, the fuel switch becomes more and more important again, as the coal price has risen significantly, which enables efficient gas power plants to compete with inefficient coal power plants. This is also the reason, why we see high gas prices compared to the prices of last summer.

Electricity prices have left the all-time lows far behind and show higher volatility recently, which is caused by political uncertainty and weather extremes. The main reason has been the rising coal price, which was driven (besides others) by the icreased demand of South-East-Asia (especially China) and the appreciation of currencies in producing countries. This increase of local currencies, like the Russian Ruble and the Columbian Peso, has increased production cost of the main coal exporters, while the strong US-Dollar increased profits for producers. The EUR/USD rate has dampened the price increase for European consumers in the past. A stronger USD has started to reverse the effect and might do so in the future. 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 25 % of the power demand of Germany. A new production record in 2017 could put further pressure on the EEX spot-market prices, but this expectation will not materialize in the next 5 years as the nuclear (and coal) phase-out will outpace the development of new renewable power capacities.

All in all, we see stronger weather dependencies for energy prices in Europe than 5 years ago and observe a trend of market price distortion by market operation design, as taxes for renewable subsidies are on the rise. However, as the economic environment is still strong, we expect a further upward trend for energy prices in the forward market. Nevertheless, we believe that the low in prices in February 2016 for the long term market (Cal 2020 or longer) will not be reached again.

We should not forget the consequences of the prolongation of the Emission Trading Scheme (ETS): 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 15 EUR/t in mid May. It is clearly an important additional upside risk for the power prices in Europe. The present price level could prevail for the summer season, especially as the spot market prices remain robust.

For your Inercomp Team

Felix Diwok

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