Please find enclosed our daily report on power, gas and oil market:
Returning from public holiday and trailing European (and US markets to a lesser extent), the Japanese equity market crashed overnight by nearly 5%. The decline was amplified by the surge in the yen against the USD, the USD/JPY pair having fallen from 122 to 112 since the start of the month. There was no news yesterday, with the exceptions of some results in the European banking sector triggering a new dire downward correction in bank shares. The EUR/USD pair kept on increasing, touching the upper limit of its upward range of fluctuation (1.1376). There are many economic indicators on the agenda today, especially Q4 GDP growth in the euro area and US retail sales in January.
– US jobless claims were down to 269k last week. This had no impact on markets. Nevertheless, it was a break compared to recent data. To be followed…
– German GDP growth in Q4 was in line with consensus expectations at +0.3% qoq, but slowed down to +1.3% yoy.
On the agenda today:
– The Italian and then euro area GDP growth figures will be released this morning. Both are expected at +0.3% qoq in Q4 2015, which looks optimistic for Italy, given the poor industrial performance during the period. We therefore fear a slight negative surprise for the euro area too.
– US retail sales are expected to have rebounded in January. Once again, it is important to look at the “control group” components that excludes components with volatile prices and therefore gives a good estimate of real spending, which will be taken into account in GDP data. This first “big” economic figure for January (if we exclude surveys) as well as data that will be released next week (on construction and industrial activity especially) will be very important for markets. If the improvement is confirmed, we do not think this will really bring back to the fore the possibility of a Fed March rate hike, but this will lower fears of recession and could therefore trigger a rebound in risk appetite.
EUR/USD: its evolution will depend on the two key economic reports released today. On the upside, the limit is now close to 1.14. On the downside, there is a first support around 1.1275, but it is already being tested this morning and then nothing really obvious before 1.11.
• Oil: Close to close at $300.6bbl for Brent ICE (This morning at $ 31.13/bbl)
After a short incursion below the $30/b mark yesterday evening, Brent prices rebounded strongly overnight (~$5/b) and the barrel of international benchmark finally trades this morning around $31/b. WTI also recovered steeply after hitting a new 13-years low at $26.05/b yesterday after 7pm, just a few cents below the minimum of Jan-20 at $26.19/b. The sentiment was “bearish as usual” yesterday until OPEC re-re-re-re-re-launched the debate about coordinated production cut in an umpteenth and desperate attempt to support the market An “it’s only words” sentiment will soon prevail on markets if OPEC does not act soon…
– The United Arab Emirates energy minister al-Mazrouei said yesterday the OPEC was willing to talk with other exporters about cutting output. The minister added that OPEC members were ready to cooperate with other producers on a cut… In line with the OPEC monthly report issued earlier this week, he also said that the rebalancing of the market will come from non-OPEC supplies expected to drop up to -800 kbd this year. Earlier in the afternoon, Venezuela had already made a proposition of “freezing” oil outputs to OPEC and non-OPEC producers… Those kind of statements become so frequent that market will soon ignore them if nothing happens. The likelihood of a coordinated response on supply cuts very low and the OPEC appears less and less as a cartel able to monitor global crude prices.
– In a new illustration of the confrontation between Saudis and Iranians, Tehran has yesterday cut its Heavy crude price for export to the Mediterranean by a larger extent compared with top exporter Saudi Arabia. The Islamic Republic is trying to find more buyers for its new exports and directly fight its neighbouring production champion to regain some market shares. While markets are focusing on useless statements from OPEC officials and oil ministers, buyers are watching the selling prices war among members that concretely fuels the downward direction on their day-to-day deals.
Today, a correction is expected after the huge gains of yesterday. Prices already lost almost 80 cents already this morning and the correction promises to be brutal as the rebound was largely exaggerated and fundamentals remain very weak. US retail sales at 2:30 pm could bring a little hope on disoriented and depressed markets but this could not be enough to offset crude prices correction… We expect Bent to test the $30/b level again today and even go deeper in the afternoon and the next support is $29.2/b. Next week could see crude markets collapse and get back to their 13-years minimum, the main issue will be the reopening of Chinese markets Monday
• Gas: Close to close at 13.38EUR /MWh for TTF CAL 17 (This morning at 13.70EUR /MWh)
Strong gas demand in the UK and a sharp drop of the pound against the euro provided some support to NBP spot prices on Thursday. Temperatures dropped 2°C below average in the UK yesterday while a low wind output triggered an increase in CCGTs’ demand, pushing British consumption 40 mm cm above seasonal norms. On the continent, prompt prices edged lower due to a strong euro and a comfortable supply outlook despite prospects of higher demand in the short-term. According to GSE data, EU 28 storage levels are at a record high for this time of year (see above graph) and 2.3 Bcm above last year’s level, fuelling the bearish sentiment for near-curve contracts. Weak oil prices continued to exert some bearish pressure on the curve.
NBP ICE March 2016 prices lost 0.09 p/th at the close (-0.32%), to 28.39 p/th. TTF ICE March 2016 were also down at the close: – 12 euro cents (-1.02%), to €12.3/MWh. Further out on the curve, TTF ICE Cal 2017 prices were assessed 11 euro cents lower at the close (-0.83%), to €13.382/MWh.
A jump in oil prices on comments from UAE oil minister (see Eco & Oil Price analysis for further details) could provide some support to far-curve contracts at the opening today. Nevertheless, we keep a bearish view for oil prices in the short-term which is likely to drag curve contracts down and erode early gains throughout the session. Expectations of below-average temperatures next week across Europe could support spot prices today although the cold spell is expected to be short-lived. All in all, we favour a stable to bearish outlook for European gas prices today.
• Coal: Close to close at $36.50 Ton for API2 CAL 17 (This morning at $37.15)
• EUA: Close to close at EUR 4.87/Ton for EUA DEC16
Emissions prices were traded down once more with a new intraday low at €4.62/t on the Dec’16 contract as stocks markets plunged throughout the day, reflecting a negative sentiment on the global economy. There were still significant volumes being traded on the front-year contract however much less on the Dec’17 and Dec’18 contracts. At the same time the open interest suggest that more positions have been opened than positions have been closed earlier this week while prices marked a very bearish trend at the same time. This could indicate that market actors confirm a bearish view even after prices broke below €5.00/t.
The outlook for today is more uncertain. We believe market prices can still go lower but this depends much on the direction that equity prices and oil prices will follow today. There was news yesterday that several oil producers could restart discussing cuts in production. Will this be relay followed is still to be seen but this supported Brent prices above $30/bbl yesterday. We favour a bearish correction on oil prices today and this could weigh on EUAs. Equities are seen rebounding from a fresh low this morning and this could support EUA prices. Important US retail sales data could move markets in both directions depending on whether they disappoint or not. All in all we would favour a cautious stable outlook for EUA prices today. This is backed as well by the oversold status of emissions contracts at the time being.
• Power: Close to close at EUR 20.70MWh for German power CAL 17 (This morning at EUR 21.05/MWh)
There are few changes in the context of the prompt market. Prices climbed further in Germany as wind levels are expected to fall to a 3 week low. In France and in Belgium, the availability of nuclear assets is due to increase backing a slight decrease in day-ahead power prices. Note that a new strike is planned next week at EDF plants on Wednesday afternoon and Thursday, the two coldest days next week, to protest against the opening to competition of hydro concessions. This is very likely to support spot prices.
The far curve remained depressed yesterday. The German Cal 17 contract fell below €21/MWh under global bearish pressure. Emissions prices were traded down once more with a new intraday low at €4.62/t on the Dec’16 contract as stocks markets plunged throughout the day, reflecting a negative sentiment on the global economy. Coal prices were also pushed further down as Brent prices went on to test the $30.0/bbl support in the afternoon. The French power baseload Cal 17 contract fell below €26/MWh. The perspective for today could be slightly different. Oil prices corrected upwards after European markets closed in the evening and this could prompt an upward correction on fossil fuels and emissions markets this market this morning. US retail sales data and a bearish correction on oil prices could however be the game changer this afternoon. We have cautious stable outlook for power prices today.