Please find enclosed our 1.2.16 report on power, gas and oil market:
Financial markets remain in a recovery mode, but signs of global economic slowdown are accumulating. US GDP growth slowed down to +0.7% in Q4 2015 and Chinese PMIs were weaker or remained weak in January. There is still no sign of improvement in China’s economic situation. The EUR/USD pair fell to close to 1.08 on Friday, as markets focused on less-bad-than-expected US consumer spending data, but markets are increasingly convinced the Fed is not going to hike rates in March (the probability attached to this scenario has fallen to 14%). The EUR/USD pair is trading close to 1.0850 this morning.
Main events:
– US GDP growth slowed down to +0.7% (qoq annualized) in Q4 2015. US GDP slowed down to +0.7% in Q4 (on a qoq annualized basis). 2015 average growth was 2.4%, as in 2014, but the yoy rate fell to +1.8% in Q4. Consumer spending was better than expected, only slowing down to +2.2% (qoq annualized), but to offset this good news, the inventory contribution to growth was less negative than expected (-0.5%), which means the mechanical rebound in Q1 will be limited. Moreover, business investment was down 1.8% and the net exports’ contribution was negative (-0.5%pt). Above all, there was no special event, such as bad weather conditions, to explain the slowdown. Markets focused on consumer spending numbers, but it should have benefited from the plunge in oil prices. – The Chicago PMI also supported the USD by rebounding sharply to 55.6, a one-year high.
– In the euro area, inflation data were slightly better than expected: up from +0.2% to +0.4% yoy for the total index and up from +0.9% to +1% yoy for the core index. But money and credit data were a bit disappointing in December.
– Overnight, Chinese PMIs fell in the manufacturing sector from 49.7 to 49.4, a 7-year low and from 54.4 to 43.5 in services. The Caixin manufacturing PMI edged up from 48.2 to 48.4. The manufacturing slowdown is confirmed and the activity is not that strong in services.
On the agenda today:
– Manufacturing PMIs will be released in the euro area (the flash estimate was down from 53.2 to 52.3), in the UK (expected slightly down) and in the US, where the 1st estimate of the manufacturing PMI was up from 51.2 to 52.7 and the ISM is expected to rebound from 48 to 48.5 after the jump in the Chicago PMI.
– US consumer spending data for December have little interest, as they are coming after quarterly data, but they should be better than expected.
– Mario Draghi will deliver a speech at the European Parliament and should of course reaffirm the ECB’s readiness to act. Fed’s Fisher will also speak this evening.
EUR/USD: if we have, as we expect, confirmation of the fall in the euro area PMI, a moderate rebound in the ISM, better-than-expected figures for US consumer spending and dovish comments from Mr. Draghi, the EUR/USD pair should fall. The 1st support is around 1.0765.

• Oil: Close to close at $33.89bbl for Brent ICE (This morning at $ 34.46/bbl)

Oil prices posted slight losses overnight after a crazy recovery week and following the March contract expiration on Friday evening (first nearby is now the April-2016 contract). A 6 $/b rebound last week took Brent first nearby as high as $36.2/b early this morning before losing some value and trading now above $35/b. The March contract for WTI holds around $32.8/b at the moment. Despite weak economic figures from China overnight that fuelled this early correction, the momentum was rather positive last week on rumours of a collaborative cut between some OPEC members and Russia. This question is central and was the hot topic last week but, so far, it seems very unlikely that such an action occurs in the short term. Moreover, it overshadowed a little bit Iranian export figures that are more likely to bring major changes on markets quite soon.
Main events:
– China and South Korea posted surprisingly weak economic data overnight (Chinese manufacturing sector contracted at its fastest pace in almost 3.5 years – Korean exports down at levels last seen at the height of the global financial crisis in 2009), fuelling concerns about Asia once again this year …
– A potential coordinated cut in production by Saudi Arabia and friends together with Russia made the headlines last week but prospects of such an action sounds more and more unlikely. After contradictory statements from Russia last week, some officials said that the Kingdom has not proposed scaling back output or asked Russia to do the same. The 5% cut rumour comes from a previous proposition from Algeria and Venezuela but was not discussed between production champions recently. Nevertheless, Iraq’s oil minister said on Saturday his country was ready to accept a decision by OPEC and non-OPEC members to cut crude production.
– Meanwhile, OPEC production touched a new output high in January as Iran increased sales following the lifting of sanctions. The organization pumped 32.6 Mbd according to REUTERS last month (including Indonesia), +0.29 Mbd compared to December. Saudi Arabia and Iraq pushed production last month but the bulk of growth comes from Iran:
– Indeed, Iran increased sales following the lifting of sanctions: according to REUTERS, Iranian output is on track to rise +0.5 Mbd this month. Based on an “Iranian source”, the news agency says that Tehran has already sold 6 super tankers with additional crude to buyers in Europe (Litasco) and Asia (esp. India).
– In US, the Bakker Hughes weekly rig count showed another -12 rigs cut last week, the eleventh cut in a row, leading to less than 500 rigs active for drilling oil in US now.
Prices are on the decline this morning after 4 positive sessions, a configuration last seen months ago. The rebound last week was very strong and very unexpected: it was a mix of technical rebound, bullish bets and optimistic rumours (KSA/Russia deal) but, watching fundamentals, the song remains the same and the only real change last week was the come-back of Iran becoming real, a rather bearish message indeed. A downward correction is expected soon and it could begin as soon as today. We are clearly in overbought territory and we see no reason for support in the short term expect maybe the US ISM at 4pm. We have a bearish view for today with $33.6/b in sight for the next sessions..

• Gas: Close to close at 15.07EUR /MWh for TTF CAL 17 (This morning at 15.03EUR /MWh)

European spot and near-curve prices ended the week on a bearish note on Friday after three consecutive bullish sessions as weak fundamentals came back to the fore and triggered some profit taking. Far-curve contracts dropped at the opening and reversed losses in the afternoon, tracking movements in the oil market once again.

British gas demand dropped by 5% compared to Thursday as temperatures climbed in the UK. Key supply sources were unchanged but the British system remained balanced due to a drop in storage withdrawals which exerted bearish pressure on near-curve contracts. On the continent, most day-ahead contracts were down due to a mild weather outlook for Monday.

NBP ICE March 2016 prices lost 0.95 p/th at the close (-3.01%), to 30.59 p/th. TTF ICE March 2016 prices were also down at the close: -36 euro cents (-2.64%), to €13.376/MWh. Contracts were more resilient further out on the curve as oil prices were steady, widening the TTF ICE WIN 16-SUM 16 spread to €1.67/MWh at the close, its highest level since July 2015. TTF ICE Cal 2017 prices were almost unchanged at the close: -4 euro cents (-0.24%), to €15.03/MWh.

As mild weather persists across Europe gas demand is expected to remain low compared to seasonal norms this week although temperatures are expected to gradually decrease throughout the week. In the UK, consumption is expected to remain 20 mm cm below seasonal norms today. On the supply side, nominations for LNG send outs from the South Hook terminal jumped to 44 mm cm/day this morning compared to 26 mm cm/day on Friday with two LNG deliveries scheduled in the next seven days. Despite nominations for slight net injections today, the UK system is a bit oversupplied this morning, highlighting how abundant supply is this winter. All in all, we favour a bearish outlook for spot and near-curve contracts today. Moreover, Brent prices could weaken today (see Eco & Oil Price Analysis for further details), adding further bearish pressure on the far-curve. First support for TTF Cal 2017 prices is their 20-day average at €14.52/MWh.

• Coal: Close to close at $39.70 Ton for API2 CAL 17 (This morning at $39.70)
• EUA: Close to close at EUR 5.91/Ton for EUA DEC16

Emissions prices failed to close above €6.20/t on Friday despite trading higher during the session as they continued to track crude oil prices. Trading volumes remain high, giving good liquidity to the market at the moment. Overall, some resistance appeared at 6.10 and just below 6.20 last week. There is still some selling pressure on the market and we believe that prices could plunge further this week, would Brent prices start to correct downwards. Downward pressure also comes from power prices with currently bearish prompt prices filtering as well to the curve. Germany reported that it had added a record 5.8 GW of wind capacities last week.

The number of open positions keeps on falling for the EUA Dec’16 contract: we interpret this as market traders being a bit lost with current price directions. Technical indicators show that this contract is less oversold now than at the start of last week and dark and spark spreads could add some bearish pressure today. We believe prices will test new lows in the coming days. Recall that the next strong support stands at €5.00/t.

• Power: Close to close at EUR 23.60MWh for German power CAL 17 (This morning at EUR 23.71/MWh)

The context on the prompt market remained bearish on Friday and over the weekend. German spot prices on the exchange cleared at €12.1/MWh, their lowest levels since the Saturday after Christmas last year, after strong winds continued to add to a well-supplied system. On Friday, the German front-month contract (February) expired at €26.55/MWh, its lowest level in 10 years. The new front-month contract this morning opened at €24.95/Mwh. According to the wind energy association BWE, Germany added 5.8 GW of Wind installed capacities in 2015, which brings these capacities to a total of nearly 45 GW (+14% y-o-y). New wind installations the year before were less than 5 GW. Adding to these fundamentals, temperatures remained warm over the weekend, a trend still ongoing, nearly 10 degrees above average. The wind will continue to blow as strongly as last week. Thermal supplies are also plenty. All in all there is no reason to be bullish at the moment on the prompt market. Prices should remain at the level of last week. The end of the week could be however less bearish will colder temperatures returning briefly on Wednesday and Thursday.
Further out on the curve, the weakness of emissions prices is weighing on German prices while fuel prices are still fairly supported. Calendar contracts rebounded further except in Germany where the current bearishness on the prompt is probably also at play. Additional wind capacities reported on Friday is a structural reason to keep prices down, and it further contributes to limit the rebound in CO2 prices. We believe that the rebound generally seen last week is not solid and our outlook remains bearish for this week. EUA prices have seen quite some resistance just below €6.20/t and, being unable to break it, could touch new low. Market fundamentals remain bearish for coal prices but for the moment crude oil is really the key price driver.