Please find enclosed our daily report on power, gas and oil market:
The mild downward correction in risky assets turned into something more severe yesterday afternoon, when oil prices fell in the wake of the Saudi Oil Minister’s speech in Houston . The mood is likely to remain gloomy today, as the economic agenda is almost empty. Moreover, the Fed n°2 delivered a rather hawkish speech yesterday suggesting rate hikes were still on the table, at odds with market expectations; The GBP fell further, below 1.40 USD. The euro strengthened a bit against the Pound, but not to the same extent as fears of Brexit are negative for Europe in general. Therefore, the EUR/USD pair made several attempts below 1.10, the euro’s weakness vs USD being also fuelled by deteriorating confidence in the euro area.
– Economic outlook is deteriorating in the euro area: in the wake of weaker PMIs, the German IFO survey showed sharp fall in expectations (to their lowest level since December 2012). The current assessment indicator remained resilient, consistent with stable growth rate so far, but lower expectations matter: they point to economic slowdown for the coming months.
– This morning, the French consumer confidence survey also confirmed the fall in the euro area consumer confidence index reported in February: the French index fell from 97 to 95, its weakest level since August.
– US economic data released yesterday were mixed: still solid increase in home prices (+5.7% yoy in December), but weaker consumer confidence and lower Richmond Fed manufacturing index fuelling fears of a new decline in the manufacturing ISM next week. Fed’s Fisher made hawkish comments, saying it was too “early to judge ramifications of the increased market volatility” of early 2016. Mr Fisher said that “similar periods of volatility in recent years had left little visible imprint on the economy”. Fed’s George added on her side that rate hike should “absolutely be on the table” at the March meeting, while implied market expectations give a 10% probability to such a scenario. We still think a March move is very unlikely, but it looks clear that the Fed wants absolutely maintain uncertainty for markets and not being forced postponing further rate hikes at following meetings because it fears markets’ reaction.
On the agenda today:
– No real key market mover on the agenda. Oil could set the trend again with the release of the EIA inventory report at 4.30pm CET.
EUR/USD: 1.10 will be tested again. The next key supports are at 1.0950 and then 1.0936 today.
• Oil: Close to close at $33.27bbl for Brent ICE (This morning at $ 32.85/bbl)
Crude prices lost some ground overnight after an almost stable session before 4pm. Brent now trades below $33/b, on the lower range of the $33-35/b tunnel it is trading in for 6 sessions. WTI also lost 5% approx. yesterday and holds slightly above $31/b this morning. Prices declined further after Saudi Arabia and Iran, the two enemy brothers of the region, both ruled out production cuts that had brought support to markets last week, dampening hopes of those who still believe a deal among OPEC members is likely…
– Saudi Arabia’s oil minister Ali Al-Naimi made some comments yesterday showing the rulers of the Kingdom did not really believe in previous positive statements about a collaborative cut, showing that all the previous signs of good will last week were only “much ado about nothing”… Al-Naimi said that a coordinated production cut by OPEC and non-OPEC exporters was “not going to happen because not many countries are going to deliver”… He also said that a proposed freeze in output at January levels, which were near record highs, would require “all the major producers to agree not to add additional barrels”. Iran called the proposal “laughable” while all producers are passing the buck on output issues… So the “freeze deal” is not on good track while a collaborative cut now seems very unlikely. In addition, ahead of a possible “freeze deal”, the close analysis of production data (not official ones but also from “secondary sources”) shows many producers are strongly increasing their production.
Nevertheless, Venezuelan Oil Minister Del-Pino still believes to convene a meeting of major OPEC and non-OPEC producers in mid-March…
– The API group said crude inventories rose +7.1 Mb in the week to Feb. 19, far above markets expectations (+3.4 Mb) but markets will mostly focus on production figures from the EIA statistical model: indeed, after a huge rig cut last month (-25% last month) and the recent 100kbd decline of production, the shale output trend is closely watched and it is expected to accelerate in the short term.
Today, main market mover will be the EIA report at 4:30 pm and the economic agenda is virtually empty. For this session, we see the downward trend continuing with small amplitude before 4:30 pm (support at $32/b). Afterwards, a rebound is possible on strong output drop or prices could fall further if stock rise is in line with API data. From my opinion, another strong drop of shale output (>50kbd loss) should support the market as it did last week and it is likely.
• Gas: Close to close at 13.84EUR /MWh for TTF CAL 17 (This morning at 13.63EUR /MWh)
Below-average temperature forecasts for the coming days across Europe continued to support spot prices on Tuesday, whereas a drop in oil prices following bearish comments from both Saudi Arabia and Iran oil ministers (see Eco & Oil Price analysis for further details) dragged curve contracts down.
NBP ICE March 2016 prices lost 0.18 p/th at the close (-0.6%), to 29.96 p/th. TTF ICE March 2016 prices were also down at the close: -7 euro cents (-0.58%), to €12.309/MWh. Further out on the curve, TTF ICE Cal 2017 prices were assessed 18 euro cents lower at the close (-1.26%), to €13.839/MWh.
Despite a further increase in gas demand in the UK (+8 mm cm day-on-day), the British system is a bit oversupplied this morning as nominations for LNG send outs jumped 11 mm cm/day higher compared to Tuesday due to a busy LNG delivery schedule in the short–term (five LNG cargoes expected to berth into the South Hook terminal until 7 March). The fundamental context remains comfortable on the continent too. Indeed, consumption could continue to increase in the coming days but gas demand seems unlikely to jump significantly in the short-term. Moreover, temperatures are expected to increase and to be closer to seasonal norms next week, dragging consumption down. Pipeline supply from Norway and Russia is strong again this morning, keeping storage withdrawals at a relatively low level for this time of year. Finally, Brent prices are trading down compared to yesterday’s close which is likely to weigh on the far-curve again. All in all, we favour a bearish outlook for European gas prices today. First technical support for the NBP March 2016 contract is the 20-day average at 29.29 p/th.
• Coal: Close to close at $38.70 Ton for API2 CAL 17 (This morning at $38.60)
• EUA: Close to close at EUR 5.41/Ton for EUA DEC16
EUA prices moved down significantly yesterday, more than we expected as lower clean dark spreads likely weighed on market prices but also as Brent prices did not resist new declarations by Saudi Arabia stating that actually OPEC members were unlikely to significantly cut oil production. In the end, most markets moved down following these declarations but bearishness prevailed even beforehand. EUA contracts could not break above their 20 day moving average, and gradually fell below two potential stop loss triggers: €5.10 and €5.0 (on the Dec’16).
We have a bearish outlook for today and believe the carbon benchmark could test the €4.62/t support again before the end of this week.
• Power: Close to close at EUR 21.50MWh for German power CAL 17 (This morning at EUR 21.40/MWh)
Despite an outage at nuclear reactor Tihange-1 in Belgium which occurred Monday overnight and is expected to last until March, 15, prompt contracts eased down a bit yesterday. Temperatures were revised higher moderately and the global supply situation remains comfortable. This is particularly the case in France and Germany with healthy nuclear and hydro on one side, and good nuclear, coal and lignite on the other side. Renewable power is still limited until the weekend: prospects for next week were also revised a bit higher.
Generally seen, the mood in futures markets turned bearish yesterday. Equity markets failed to find further ground for additional rises yesterday and latest comments from Saudi Arabia and other OPEC members on oil unveiled the lack of consensus at this stage to freeze or cut production. Brent prices dropped yesterday afternoon.
This was bearish for gas prices: the TTF year-ahead contract is now being traded at €13.6/MWh, against latest highs of €14.0/MWh.
In Colombia, union members decided to start a 5-day vote for a possible strike action on Friday to increase pressure on coal producer Cerrejon and seek a stronger rise in wages and more support for education amongst others. If voted, the strike could start 10 days after the vote ends, by mid-March. Despite this, the uptick in coal prices over the past days led yesterday to some downward correction. The API2 year-ahead contract dropped from an intraday high of $39.6 to 38.3/ton at the time of writing.
Carbon contracts corrected downwards as well:
All in all, some downside for power markets is possible today. Carbon EUA dec16 contract could try to test €4.62/ton (latest low) in the short term. If it breaks it, €4.5/ton and is likely in sight. Considering coal, we do not believe prices will rebound as of today but a looming strike in Colombia could bring prices back up at a later stage.
If €21.2/MWh is broken today, the German year-ahead contract could try to come down to €20.6/MWh.