Please find enclosed our daily report on power, gas and oil market:
Extremely volatile session on financial markets yesterday. While measures announced by the ECB were initially praised by markets, the fact that Mr Draghi said there may not be further rate cuts triggered a U-turn. Then markets gradually expressed pessimism regarding the potential efficiency of ECB measures and more generally Central Banks’ action. The EUR/USD fell to its lowest level since Feb. (close to 1.08) before climbing to its highest level since Feb 15. (above 1.12). It remains very high this morning. A downward correction looks very likely now.
– The package of measures announced by the ECB widely topped expectations, but showed its unease with pushing rates too low into negative territory, given the negative impact such measure could have on banks’ profitability. The ECB cut its key rates and not only the deposit rate (from -0.3% to -0.4%) as expected. The main refinancing operation rate and the marginal lending facility rate were also cut by 5bp, bringing them to zero and 0.25% respectively. The ECB also expanded its monthly QE program from €60bn to €80bn and made non-bank corporate bonds eligible to this program. In order to cancel the negative impact of negative rates for banks, the ECB will finally launch 4 new TLTRO from June 2016 to March 2017, with 4-year maturity at interest rates between 0% and -0.4%, depending on the amount of bank lending. The ECB will therefore seek boosting credit by directly giving money to banks to do so.
Everything went well. Markets were pleased with this package of measures in sharp contrast with their reaction to announcements made in December. But when Mr Draghi said he thought it would not be necessary to push rates further low unless things change dramatically, markets suddenly changed their mind. What seemed to reflect disappointment regarding the fact that nothing was to be expected from the ECB anymore became fear that central banks in general had already attempted everything possible without any tangible result.
This is rather unfair. Mr Draghi is probably right when he explains that the worst has so far been avoided thanks to measures taken by the ECB and this new package is more ambitious than the former ones. Markets should probably reconsider it with more indulgence today.
On the agenda today:
– Nothing significant on the agenda today. The ECB should remain the main topic of discussion on markets and we expect a rebound in risky assets.
EUR/USD: the rise in the euro looks way too strong. The interest spreads is widening at its expense and more QE also means putting more euros on the markets, which is also negative. Moreover, there are strong political risks ahead for the euro area totally underestimated by markets and to finish, the Fed is more likely to hike rates if the USD is weak than if it is strong. We expect a significant downward correction in the EUR/USD pair from current levels.
- Oil: Close to close at $40.05bbl for Brent ICE (This morning at $ 40.62/bbl)
Brent prices have stabilized between $40/b and $41/b for the last three sessions and remained in this range yesterday despite a very volatile session. Indeed, after a quiet morning, the ECB announcement sent mixed messages to the markets just before some news came out saying a meeting on the “freeze deal” was finally very unlikely to happen as Iran is not ready to join the Doha process. All in all, close to close move was negative and crude prices offset gains from Thursday’s session; Brent posted one dollar loss and traded this morning around $40.5/b before recovering up to $40.7/b. The barrel of American WTI holds around $38.7/b at the moment, above its yearly $38.4/b high of early January, on a levels last seen in early Dec-15.
– ECB announcements followed by Mario Draghi’s speech in Frankfurt failed to give market a clear view for the future. Easing policy decisions first pushed markets up and fuelled positive sentiment before Mr Draghi dampened hopes of further support in his speech (see daily eco for details). The dollar then had very strong moves in both direction to end the day much weaker than it was in the morning, at odds with expected targets, therefore providing some support crude prices.
– Iran participation at the “Doha process” to implement a freeze deal between OPEC and Non-OPEC countries appears more and more as the key issue to be addressed during the three weeks remaining before the end of March. According to REUTERS, “sources familiar with the matter” yesterday said the meeting between oil producers is unlikely to take place in Russia on March 20 as Iran is yet to say whether it would participate in such a deal… Tehran feels it should be exempt from the agreement as it wants to recover market share it lost under Western sanctions and some countries (such as Kuwait on Tuesday) now claim they will commit to the deal only if all major producers including Iran do so… The equation becomes more and more complicated for the “freezing-4” (KSA, Russia, Qatar, Venezuela) and it seems now OPEC’s Gulf members favour meeting in the first half of April, in Doha or another Gulf city.
– Libya’s eastern oil firm said it hopes to start selling crude this month : The National Oil Corporation (NOC) in the east (backed by the internationally-recognized government) has been trying hard to wrest control of the sector from Tripoli, but the national oil company based there still has the support of major oil trading firms. Eastern NOC has signed 14 contracts with potential crude buyers since September but none has yet found a tanker willing to collect the oil, this could happen soon…
Markets should remain in the current $40-41/b range for the end of this week as no major movers are expected today. This week was finally rather quiet after the +20% rise in the two weeks before… Next week, discussions about the meeting of OPEC and Non-OPEC producers will be driving then market as Russian Energy Minister Novak is set to visit Tehran as soon as Monday.
- Gas: Close to close at 13.70EUR /MWh for TTF CAL 17 (This morning at 13.80EUR /MWh)
Prospects of lower demand in the very short-term dragged European spot prices down on Thursday. An undersupplied UK system due to a fall in LNG send outs failed to lift NBP day-ahead prices. On the continent, higher Norwegian imports to the Netherlands and lower residential demand weighed on TTF spot prices. Curve contracts tracked volatile movements in currency and oil markets and were pressured by an upward revision in temperature forecasts for the end of next week. All in all, the euro strengthened against the pound after the ECB meeting (see Eco & Oil Price Analysis for further details), exerting bearish pressure on euro-traded contracts. Oil prices dropped below $40/bbl at the gas close, dragging far-curve contracts down.
NBP ICE April 2016 prices lost 0.44 p/th at the close (-1.55%), to 27.98 p/th. TTF ICE April 2016 prices were also down at the close: -20 euro cents (-1.63%), to €11.877/MWh. Further out on the curve, TTF ICE Cal 2017 prices were assessed 20 euro cents lower at the close (-1.45%), to €13.695/MWh.
The UK system is oversupplied this morning as gas demand is expected to decrease further today and this weekend while pipeline supply from the North Sea increased slightly . This could weigh on NBP spot prices today although colder weather is expected to prevail at the beginning of next week before the return of milder weather for the second half of March. However, temperature forecasts were volatile recently, leaving some uncertainty about demand levels for the coming weeks. Russian gas imports are stable and still at a very high level, reinforcing supply confidence. Fundamentals still point to a slightly bearish direction today overall. Nevertheless, Brent prices rebounded after yesterday’s close and are trading around $40.7/bbl this morning which could provide some support to the curve after significant losses recorded yesterday. Consequently we favour a stable outlook for European gas prices today.
- Coal: Close to close at $41.00 Ton for API2 CAL 17 (This morning at $41.45)
- EUA: Close to close at EUR 5.08/Ton for EUA DEC16
EUA prices have been charting a triangle since the beginning of February which indicates price consolidation at current level (+/- €5.00/t) with no buying or selling position prevailing over the other. Prices will eventually have to break out of that consolidation pattern next week, either up or down. We might thus expect more volatility in the coming weeks.
Reasons for a bullish break-out could be crude oil prices increasing sharply and breaking above resistance levels. Is this likely? This is not our main scenario with the current oversupply but Russia and OPEC again agreed to meet in the coming days which could support prices further. Last minute demand before the compliance deadline is still a possibility although we would tend to exclude it in the current context. There could also be a stronger demand at auctions.
Reasons for a bearish break out could be more selling pressure from long actors currently getting more free allowances, signs or confirmation that there will be no significant political changes in the current reforms. We believe these factors are already priced in, but if the selling pressure wins, technical selling would do the rest.
All in all, although the context is more bearish at present, we believe there is a little more risk to the upside with a rebound up €5.5/t. To the downside, the next support would be €4.4/t. In the meantime, our outlook is neutral for today (at around €5.00/t).
Power: Close to close at EUR 21.95MWh for German power CAL 17 (This morning at EUR 22.15/MWh)
On the prompt, markets’ view for next week remained relatively supportive yesterday. Temperatures are still seen below average over most of the week and wind generation could be largely below average.
For next week, baseload prices in Germany and France are currently being traded at €24.75/MWh and €26.75/MWh respectively. Power delivered into week 12 is cheaper at this stage: €20.75 and 23.75/MWh.
Note that over this week, the fundamental picture in France improved moderately thanks to higher nuclear generation, which is now clearly at record-highs for this period of the year. On top of that, recent precipitations also provided more hydro power to the hexagon which makes it easier to balance the system and reduces the tightness of the system. Germany is currently in a quite different position mainly due to weaker lignite production (around 17GW lately, 2-3GW lower than levels seen last year) and poor wind output.
This mainly explains why French power prices came once more closer to German power yesterday. The spread on the Cal17 maturity was at €3.67/MWh at the close on EEX.
Yesterday, the benchmark German year-ahead contract was resilient during the morning around €22.3/MWh but finally came off, thanks to a strong rise of the euro against the USD and probably also due to oil as it came off a bit. Coal prices in USD terms also declined.
At the end of the day, the German contract lost close to €0.3/MWh to be traded just below €22/MWh. For today, and after yesterday’s losses, we do not see sufficient ground again for further losses in the next hours: the euro could weaken against the USD and oil prices could show some resilience. Our outlook is stable. We see the German contract moving between €21.95 and 22.45/MWh.