Please find enclosed our daily report on power, gas and oil market:
The ECB sent strong signals that further monetary easing would come with near-certainty in March and as in parallel, oil prices rebounded strongly, risk appetite came back on financial markets. Yet, this respite may be temporary, as China should remain the main source of worry and we have not seen anything really positive coming from China for a long time. The euro weakened logically after Mr. Draghi’s comments, but did not weaken that much eventually. Investors remain cautious after December’s disappointment and one has to keep in mind that further easing from the ECB should go hand in hand with a Fed status-quo. The EUR/USD pair is trading slightly above 1.08 this morning.
– The ECB left its policy unchanged but warned that given lower-than-expected inflation and the rise in downward risks (coming from emerging markets’ crisis, geopolitical tensions), it would be “necessary to review and possibly reconsider the monetary policy stance at the next meeting, in March, when the new economic projections are available”. Answering questions, Mr. Draghi sounded very worried about inflation and potential 2nd round effects of the oil price decline, even if it would support consumer spending. He said there would be “no limit” in the ECB’s action. Markets reacted, but not as strongly as in October (the EUR/USD pair fell from 1.09 to 1.08, bond yields eased by few basis points). Investors fear that history repeats itself and the ECB disappoints in March. A new move looks highly likely but we remain sceptical about the ability of the ECB to deliver something really bold, as long as the economy is resilient.
– There were in parallel some US indicators released: the Philadelphia Fed index rebounded in January, but our estimate of the manufacturing ISM kept on declining as this rise was not enough to offset the plunge in the New-York index. We will look closely at other regional indices. Moreover, jobless claims rose further to near 300k (293k). The upward trend has been in place for 3 months. This is not volatility anymore. All in all, poor US economic data, lower oil prices pulling down inflation and the ECB keeping downward pressures on the euro (and therefore upward pressures on the USD) can only force the Fed to stop its nascent tightening cycle.
On the agenda today:
– PMIs in the euro area will be closely watched. French indices were a bit disappointing: the fall of the manufacturing index to 50 was worrying while the rise in the services index was a logical correction of the plunge that followed terrorist attacks.
– UK retail sales should be down in December after their sharp rebound in November, which may send the GBP lower again.
– US home sales are expected to rebound sharply in December, as their fall in November was linked to changes in regulation. This is well anticipated and should have little impact.
EUR/USD: The PMIs will be the main drivers. If still strong, markets will put a bit more Mr. Draghi’s words in perspective and the EUR/USD should rebound. If weaker, the EUR/USD pair could fall to around 1.0770.
• Oil: Close to close at $29.25bbl for Brent ICE (This morning at $ 30.77/bbl)
Oil prices posted significant losses yesterday for the second session in a row, moving further away from 13-year lows touched earlier this week. The barrel of Brent now trades above $30.8/b for the first time this week as well as the WTI , taking the transatlantic spread very close to 0. The +1 $/b rebound was steep overnight and surprised markets as no main fundamental change occurred but : first ,we are getting closer to the $25/b mark that is a potential floor for many (with the lack of other support in current unchartered territories) and, secondly, the market was seeking some respite after two weeks of free fall.
– The EIA report released yesterday was however rather bearish as it showed another strong rise in US crude oil stocks (+4Mb) together with stocks of products jumping also (+4.6Mb for gasoline, gasoline inventories at highest since 1990, and -1Mb for distillates, thanks to colder temperatures). Once again, crude output posted a marginal rise, +8 kbd, and holds strongly around 9.2 Mbd, still showing its unexpected resilience that pulls global crude markets down for months…
– Apart from the cold weather in North America and Europe that follows an extremely mild winter start, the other supportive element yesterday was the declaration of Saudi Aramco chairman Khalid Al-Fali at Davos saying current price levels were “irrational”! He didn’t say that Saudis will do “whatever it takes” to support prices but that demonstrates at least that Saudis are aware that they are facing a real issue here… However, the Kingdom gave no signs that it will come to oil market rescue and Al-Fali also said in Davos that his country could withstand low crude prices for a “long, long time”…
– In Libya, militants from the Islamic state continue to harass guards around Ras Lanuf and Es Sider terminals. Islamic State militants have managed to establish a foothold in the city of Sirte, right in the middle of the country just between the two rival governments and Libya is clearly a major target for the terrorist organization.
Rising prices surprised everybody this morning and Brent above $30/b will restore a bit of optimism on markets today! Nevertheless, the bounce in prices looks unsustainable given soaring US inventories amid persistent overproduction… For these reason, we could see prices continuing their way upward for a while this morning but we don’t see the rebound lasting in the late session and prices could hold around $30/b for the end of this week before a new decline next week.
• Gas: Close to close at 13.28EUR /MWh for TTF CAL 17 (This morning at 13.83EUR /MWh)
European prompt contracts weakened further on Thursday, pressured by an upward revision in temperature forecasts for the next two weeks. Nevertheless, an unplanned outage at the Bergermeer storage site in the Netherlands curbed losses in the afternoon. Curve contracts traded in euro followed the bearish trend at the front in the morning, but a late rally in oil prices and currency shifts after the ECB meeting pushed them higher in the afternoon.
NBP ICE February 2016 prices lost 0.58 p/th at the close (-1.91%), to 29.81 p/th. TTF ICE February 2016 prices were also down at the close: -22 euro cents (-1.72%), to €12.577/MWh. TTF ICE Cal 2017 prices hit a new record low to €13.1/MWh intraday, but they were finally almost unchanged at the close to €13.28/MWh.
Brent prices continue to strengthen overnight and are trading just around $30.5-31/bbl now. This triggered a sharp increase in European gas prices at the opening. Nevertheless, the fundamental context remains bearish with almost two weeks of mild weather ahead. Moreover, UK gas demand is expected to plunge by almost 50 mm cm today compared to Thursday, leaving the UK system oversupplied despite a sharp drop in storage withdrawal nominations. Norwegian production is back above 350 mm cm/day this morning as the unplanned outage at Karsto is over and the outage at the Oseberg field is due to end today.
All in all, we favour a slightly bullish outlook for prompt contracts today as weak demand forecasts should curb early gains. Despite a bearish opening, the EUR/GBP rate could increase throughout the session, exerting some bearish pressure on euro-traded contracts and supporting NBP prices. The outlook is rather bullish for the far curve due to the rebound in oil prices. TTF Cal 2017 prices could jump above their 5-day moving average at €13.57/MWh but should remain below the €14/MWh level.
• Coal: Close to close at $37.75 Ton for API2 CAL 17 (This morning at $38.70)
• EUA: Close to close at EUR 6.33/Ton for EUA DEC16
No analysis today
• Power: Close to close at EUR 23.25MWh for German power CAL 17 (This morning at EUR 23.50/MWh)
A strike by workers of EDF over planned job cuts has cut French power output by at least 11 500 MW yesterday, forcing France to import about 2 000 MW of power in the afternoon while the country was exporting about 4 200 MW on Wednesday.
However, this 1-day strike was anticipated and French day-ahead prices fell significantly yesterday, and the drop spread to neighbouring markets in Belgium, Netherlands and Germany. Additional bearish pressure for day-ahead prices came from forecasts of higher wind supply and lower demand on Friday due to rising temperatures.
Prices on the far curve were also lower, falling to new fresh lows, on the back of lower coal, gas and EUA prices.
Although fundamentals remain bearish, the current rebound in oil prices could lend support to European power prices today, particularly on the far curve.