Please find enclosed our daily report on power, gas and oil market:
Risk aversion returned overnight with still the same symptoms: crash in equities, commodities and emerging currencies, falling bond yields, strong demand for Yen and gold. There was no reason to be optimistic after the release in Chinese economic data and the downward revision in the IMF global growth forecasts tipped the scales in favour of the bears on financial markets. The USD is broadly weaker, as US bond yields are now close to their October lows (below 2% for the 10y). Prospects of further Fed rate hikes have declined at quick speed: the implied probability of a move is now only 24% in March, 41% in June and 53% in September. The EUR/USD pair is firmer but only slightly, as markets expect the ECB to ease its policy further as soon as March.
– The IMF cut its global GDP growth forecasts to +3.4% in 2016 and 3.6% in 2017, 2 tenths less for each year than in October. The main downward revisions were made for commodity producers (Russia and its satellites, Brazil, Middle-East, Nigeria, South-Africa…) among emerging countries and for the US economy as well as France for advanced countries. The IMF underlined the lower-than-expected positive impact of lower oil prices on growth, mainly due to financial strains for exporters and deleveraging needs for consumers. Downward risks continue prevailing in the new IMF scenario, of course linked to China, the level of corporate debt, its exposure to stronger USD & higher interest rates, geopolitical tensions and a rise in risk aversion. In our view, this new IMF scenario betting on stronger growth in 2016 is still too optimistic.
– The German ZEW survey was more optimistic than expected: the expectations index fell but less than we feared (10.2 after 16.1) and the current situation index rose further from 55 to 59.7.
– The US NAHB housing market index remained stable at high level. The housing market is one of the few sectors where activity is resilient in the US.
On the agenda today:
– Will UK job and earnings data plumb a bit more the GBP? Jobless has not declined for months and earnings are slowing down. So the answer may be “yes”, but the GBP took a severe hit yesterday after Mr. Carney said explicitly there would be no rate hike in the short term. Yet, this was everything but a surprise… EUR/GBP is trading above 0.77 and GBP/USD under 1.42.
-The main indicator will be US inflation expected to accelerate for both the total and core measures in December. Construction data will also be released, but data should be mixed: up for housing starts, down for permits.
EUR/USD: the downward correction did not materialize as we expected and technically, the EUR/USD pair seems caught in a 1.09-1.0975 range today. The USD could be supported by US inflation data, but the international context could offset that. We may have to wait for the ECB tomorrow to see stronger move.
• Oil: Close to close at $28.76bbl for Brent ICE (This morning at $ 27.95/bbl)
Brent prices held around $28.5/b yesterday and touched a minimum just 40 cents above last Monday’s 13-years low at $27.67/b while WTI set new minimum at $27.43/b, level last seen in September 2003. The bearish momentum was fuelled yesterday by the release of the IEA monthly report saying that markets could “drown in oversupply” in 2016. Asian markets were also strongly on the decline overnight , reacting with a lag to the weak data earlier this week… All in all, the atmosphere is a bit heavy as the year begins and markets will need real support to change their direction as bearish news are accumulating…
– The first monthly report of the year from IEA is saying that the oil market faces the prospect of a third successive year when supply will exceed demand by +1 Mbd and the report raises doubts about the ability of the oil system to absorb it efficiently… The agency also says this context could push the price below its current 13-year lows. The IEA left its estimate of growth in global demand for 2016 unchanged from its previous monthly report at around +1.2 Mbd but it added that the oil surplus could exceed demand by +1.5 Mbd in the first half of 2016 If Iran boosts exports by +600 kbd in this period.
– According to a REUTERS survey published yesterday, there is more storage space for crude around the world than anticipated and that could help prevent further falls in the price: REUTERS says new storage tanks built in recent years, mostly in the United States and Asia, leave hundreds of millions of barrels of space to fill…
Today, no major market movers expected and that should leave the markets on their current bearish trend. The $25/b mark is in every head and we’ll need a really bullish news to avoid it in the coming sessions. Knowing that EIA stocks will be released tomorrow due to the day off in US last Monday and that they are expected bearish, we can reasonably be rather bearish for the end of this week. Today, we have slightly bearish view with first support at Monday’s low at $27.67/b.
• Gas: Close to close at 13.77EUR /MWh for TTF CAL 17 (This morning at 13.30EUR /MWh)
Cold weather and an ongoing outage in Norway continued to support European spot prices on Tuesday. Curve contracts were volatile and finally little changed at the close, tracking moves in external factors (Brent + EUR/GBP rate).
UK gas demand increased further yesterday to 360 mm cm but the British system was oversupplied in the morning, which finally kept NBP day-ahead prices stable at the close. Gas demand was also very strong on the continent, but high storage withdrawals kept systems well-supplied, limiting any significant increase in spot prices.
NBP ICE February 2016 prices gained 0.08 p/th at the close (+0.25%), to 31.62 p/th. TTF ICE February 2016 prices were slightly down at the close: -4 euro cents (-0.3%), to €13.35/MWh. Further out on the curve, TTF ICE Cal 2017 prices jumped to €14.05/MWh in the afternoon tracking gains in the oil market, but they were finally almost unchanged at the close, pressured by a strong increase in the euro against the pound: -2 euro cents (-0.15%), to €13.77/MWh.
With temperature forecasts close or above average for early February and a gradual increase in temperatures in sight by the end of the week, the fundamental context remains resolutely bearish today. The outage at the Oseberg field in Norway was once again extended this morning but the impact was revised downwards. Despite a further increase in gas demand, the UK system is slightly oversupplied once again this morning. On the continent, storage levels remain in line with record levels seen last year despite strong withdrawals over the last few days, adding pressure to the near-curve. Moreover, Brent prices weakened since yesterday’s close, fuelling the bearish sentiment at the opening. A stronger euro against the pound could provide some support to the NBP curve, whereas it could exert additional bearish pressure on euro-traded contracts.
• Coal: Close to close at $38.20 Ton for API2 CAL 17 (This morning at $37.80)
• EUA: Close to close at EUR 6.74/Ton for EUA DEC16
Carbon prices corrected upwards yesterday in the wake of a higher oil and related energy markets. Equity markets were also temporarily supportive. The EUA dec16 contract came close to €7/ton but the momentum was not strong enough to break this important psychological level on the upside.
Markets are quite moody for the time being and volatility could remain in place as long as the global market sentiment does not turn clearly in one direction.
The cover ratio at allowance auctions is also rather weak so far this week. After 1.82 reached on Monday, it rose moderately to 2.7 yesterday.
This will likely continue to be of some guidance to carbon markets for the coming days. If the ratio remains at these levels, the impact could be neglect able. If it turns out up, it could be moderately supportive.
• Power: Close to close at EUR 23.85MWh for German power CAL 17 (This morning at EUR 23.40/MWh)
Current tightness on spot markets is expected to ease down rather soon. NWE spot markets are currently under the influence of colder weather, higher consumption, weaker wind output and a strike action in France expected to start today at 16:00, 5 hours earlier than expected.
Spot prices are currently at their highest since the start of the year with France being the most expensive market today due to this strike. Hour 18 was traded at €103.18 and hour 19 at €127.65/MWh. Intraday prices were also quite high in France since the start of the week as on top of cold weather a large number of outages occurred.
From Friday, spot prices are to ease down though. Next week will also benefit from higher temperatures. Week-ahead contracts are much softer than current spot levels.
On the far curve, the market was range-bound yesterday. Clean fuels costs were strongly in line with oil prices as oil was one of the key drivers for gas and coal since the start of the year. The Brent 1st nearby contract came first up to above $30/bbl but finally pared gains later in the afternoon.
In terms of margins, there were almost no changes yesterday.
Over the coming days, markets could be rather moody. This morning, oil is down again to almost $28.0/bbl which pulls energy prices back down. The German year-ahead contract is being traded at €23.45/MWh for the time being. Lows of €23.20/MWh could be again in sight for today but it could only be temporary in case oil prices rebound again.