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SEB Jordbruksprodukter, 9 augusti 2012

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SEB Veckobrev Jordbruksprodukter - AnalysMarknaden avvaktar fredagens WASDE-rapport. Rörelserna blir säkerligen stora på fredag. Har man positioner i terminer eller i oprissäkrat spannmål att köpa eller att sälja, ska man nog vara beredd på att agera snarast efter att rapporten släpps klockan 14:30 på fredag.

Gårdagens ministermöte i Ryssland med syfte att diskutera ”food security” gav följande resultat: vice statsministern Arkady Dvokovich sade för det första att man håller fast vid sin prognos om en spannmålsskörd på 75 – 80 mt. För det andra sade han att det inte fanns någon anledning att begränsa exporten. Vi tror, på goda grunder, att skörden av spannmål totalt hamnar på högst 66 mt och motiverar detta mer i detalj nedan.

Teknisk analys av framförallt vete och majs indikerar att priset kan bryta upp efter att ha konsoliderats i två veckor. Vi anser att risken alltjämt är på uppsidan i spannmålspriserna och i oljeväxterna. De senaste två veckornas lugn tror vi får ett abrupt slut senast på fredag klockan 14:30.

Förväntningarna på WASDE-rapporten

Nedan ser vi marknadens förväntningar på WASDE-statistiken som publiceras på fredag klockan 14:30 svensk tid. Alla siffror är i miljoner bushels. Marknaden kommer att fokusera på majs och sojabönor och på vilken sida siffrorna hamnar i förhållande till de väntade, kommer att avgöra åt vilket håll priserna på dessa – och vetepriset rör sig.

Förväntningar på WASDE-statistiken

Förväntningar på WASDE-rapporten

Odlingsväder

Southern Oscillation Index har tagit sig upp till neutrala förhållanden igen, men det anses vara temporärt, eftersom de flesta prognosmodeller pekar på att ENSO ska vara nära El Niño-förhållanden, dvs med SOI närmare eller lägre än -8.

Australien - Southern Oscillation Index

Australiensarnas prognos för ENSO pekar som vi ser nedan på att El Niño kan utveckla sig under hösten, men att det än så länge är osäkert. ENSO surfar precis på gränsen till El Niño. Nedan ser vi den allra senaste ensembleprognosen, som just publicerats.

ENSO surfar precis på gränsen till El Niño

Om vi jämför den med förra månadens ser vi att sannolikheten för El Niño har minskat något. Ingenstans framåt i tiden ligger den senaste ensembleprognosen på ”El Niño”-territorium. Det gjorde den för en månad sedan.

Diagram för NINO34

Vete

Ukraina har i princip skördat färdigt. I Ryssland väntas mer nederbörd. Australiens veteodlingsområden har 60%-80% mindre nederbörd än normalt och man oroar sig där för att tendensen till El Niño ska stärkas. Det motsatta gäller i Argentina. Argentina har haft riklig nederbörd, men prognosen är att det ska bli torrare efter helgen.

I Europa har det kommit in torrare väder, utom som bekant i norra Europa. Som berört ovan ledde inte gårdagens ministermöte om ”food security” i Ryssland till ett exportstopp. Men det utesluter inte att det ändå kan komma. En del menar att det är uteslutet att Ryssland inför exportstopp eftersom de nu är medlemmar i WTO. Det finns dock inte något som hindrar att Ryssland ändå inför någon typ av exportbegränsning eftersom dessa är tillåtna under vissa förhållanden och dessa bestäms av landet självt. Den som tvivlar på detta kan läsa själv på WTO:s egen hemsida.

Som nämnt ovan sade vice statsministern Arkady Dvokovich att skörden blir 75 – 80 mt. Det tror vi inte alls på. Vi tror att total spannmålsskörd hamnar på 66 mt. Per den 3 augusti låg hektarskörden 30% under förra årets. Skörden förra året uppgick till 94 mt och 0.7 x 94 = 65.8 mt. Hektarskörden i Volgaregionenväntas bli 50% lägre än förra året. Vartefter skörden flyttar sig norrut, sjunker hektarskörden. Vi kommer osökt att tänka på Winston Churchills beskrivning, som fast ständigt aktuell, passar särskilt bra här: ”I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian national interest.”

Vi vet inte, men vi gissar att Ryssland kommer att införa någon slags exportbegränsning för att få det här att gå ihop. Det är den enda logiska slutsatsen. Detta kommer att trycka upp priserna ännu mer. Förra veckans nyhet om att den amerikanske jordbruksattachén i Kina uppskattade att Kinas veteskörd skulle bli 8 mt lägre än USDA estimerade i juli gick spårlöst förbi i marknaden.

Frankrikes jordbruksdepartement höjde skördeestimatet till 36.7 mt (+0.8 mt). Det är 2.7 mt mer än förra året.

Matifvetet med novemberleverans har format en ”bullish” triangel. Triangeln bildas av att topparna sjunker och bottnarna stiger. Efter den här typen av prisuppgångar som har varit brukar en triangelformation vara en konsolideringfas inför en ny våg av prisuppgångar. Mot bakgrund för det första av risken för en dålig rapport från WASDE på fredag och Rysslands av allt att döma falska uppgifter om hur stor skörden väntas bli i landet, pekar det mesta väsentliga fundamentala informationen vi har, i samma riktning som den tekniska analysen. Vi är inte tvärsäkra, och det är bäst att avvakta och se och sedan försöka vara bland de första som agerar, men det mesta tyder på att priset kommer att fortsätta uppåt.

Bullish triangel för Matif-vete

Nedan ser vi Chicagovetet med leverans i december. Vi ser samma triangelformation, som är bullish, i det här diagrammet.

Chicagovetet med leverans i december

Nedan ser vi prisskillnaden mellan Chicagovete med decemberleverans och Matifs novemberkontrakt. Chicagovetet är omräknat till euro per ton. I den nedre delen av diagrammet ser du kvoten mellan Chicago och Matif. Vi ser att Chicago dragit ifrån Matif och att premien just nu är 3.68%. I början på maj var Chicagos decemberkontrakt 10% billigare än Matif. Detta gör att det finns en potential för Matif att gå upp i pris, bara för att komma ikapp. Ett ryskt exportstopp skulle se till att detta hände.

Prisskillnaden mellan Chicagovete med decemberleverans och Matifs novemberkontrakt

Nedan ser vi hur terminspriserna på Matif och Chicago förändrats den senaste veckan. Backwardation är kraftigare på Matif än i Chicago. Allt annat lika, om man vill prissäkra, får man högre pris på Chicagobörsen. Vill man köpa terminskontrakt med leverans 2013 eller 2014 bör man göra det i Matifkontrakten. Eventuellt kan det vara intressant att handla dem mot varandra.

Terminskurvor för vete den 8 augusti 2012

Maltkorn

Novemberkontraktet på maltkorn ligger i en nedgångsfas som har stora likheter med vad som i efterhand ofta identifieras som en rekyl inför en ny, kraftig prisuppgång.

Maltkorn - Priset i nedgångsfas

Potatis

Potatispriset för leverans nästa år har gått upp över 16 euro och tangerar högstanoteringen 17 euro per deciton. Vi skrev förra veckan om intervallet 14 – 16. Att priset nu gått till 17 innebär ändå inte att intervallet är överspelat. Men skulle priset orka gå över 17 euro är intervallet brutet. Det är ett svårt läge nu, när spannmålsmarknaden ser så ”bullish” ut och minst två avgörande besked kan komma inom kort:

WASDE på fredag och när som helst, ett ryskt exportstopp. Om vi inte visste detta, skulle vi tro att priset skulle vända ner på potatis från de här nivåerna.

Diagram över potatispriset år 2012

Majs

Lättare regn förekommer i mellanvästern, men detta är sannolikt för lite och för sent. Det torra vädret väntas bestå kanske så länge som mot slutet av augusti. Nederbörd har ökat över Ukraina och Ryssland. Det kanske gör någon nytta i Ryssland, men i Ukraina är det för sent. Måndagens crop ratings visade att majs i good / excellent condition minskat 1% till 23%. Poor condition till very poor condition ökade med 2% till 25%. Nedan ser vi ett diagram som visar good/excellent condition sedan 1986. För 24 år sedan, år 1988 låg andelen prima majs på 18%. Annars ser vi att det är ovanligt dåligt i år.

Crop condition för majs

USDA väntas sänka sitt estimat för amerikansk skörd. USDA har också en tendens att inte pytsa ut alla dåliga nyheter samtidigt. Dåliga siffror brukar följas av mer av samma sak, fram till den slutliga siffran i januari. Priset på decembermajs har även den senaste veckan rört sig ”sidledes”. Marknaden är helt klart trött. Alla väntar på fredagens WASDE-rapport. När den kommer blir det säkert nytt liv i marknaden. Och då troligen uppåt.

Utveckling av majspriset - Diagram över 2012

Sojabönor

Det är små förändringar avseende vädret i de delar av USA där sojabönor odlas. Lättare regn väntas i delar av mellanvästern, men prognoserna visar att det kommer att vara ganska torrt ända fram till slutet av månaden. I Indien har nederbörden ökat, framförallt i de torkdrabbade nordvästra delstaterna.

Osäkerheten inför fredagens WASDE-rapport är stor. Marknadens uppfattning om avkastning per acre i USA varierar mellan 35.8 och 39.5 bushels per acre. Skördad areal varierar varierar också mellan 74 och 75.5 miljoner acres. USDA har en tendens att (fortsätta) sänka avkastningsestimaten fram till dess de publicerar den slutliga siffran i januari.

Crop condition som publicerades i måndags låg kvar oförändrat på 29% good/excellent från veckan innan. Däremot ökade andelen i poor/very poor condition med 2%. Som vi ser i diagrammet nedan får vi gå tillbaka till 1988 för att hitta en lägre nivå än 29% i good/excellent condition. Då nåddes som lägst 17%.

Pris på sojabönor från 1986 ill 2012

En rekordskörd väntas från Sydamerika nästa år, men fram till dess ska världen hushålla med USA:s skörd. Sydamerikas produktion gynnas av att ENSO, som vi sett ovan ligger nära (eller går helt in i El Niño). Detta innebär riklig nederbörd i Sydamerika. Senaste siffran på hur stor andel som brasilianska bönder redan sålt av kommande skörd är 41%. Den låg på 10% samma tid förra året. Malaysia har höjt exportkvoten för palmolja som kan exporteras skattefritt. Lagren av palmolja har vuxit i landet. Kina har fortsatt att sälja av sina stora lager och har ett importbehov om uppskattningsvis 60 mt av 2012/13 års skörd. Brasilien har exporterat 4.1 mt i juli och bör nu ha endast 4.5 mt kvar att exportera; om man utgår från Abioves estimat om en möjlig export på 31.1 mt. USA har i princip inga gamla sojabönor kvar, så hur Kina tänker lösa det här problemet ska bli intressant att se. Nedan ser vi kursdiagrammet på sojabönor med leverans i november. Den uppåtgående trendlinjen har precis brutits. Stöd finns nu på 1536 cent. Underifrån kommer också 55-dagars glidande medelvärde, som ibland sammanfaller med tekniska stöd. Sojabönor ser ur teknisk synvinkel inte lika ”bullish” ut som vete och majs.

Teknisk prognos för pris på sojabönor

Raps

Priset på novemberterminen befinner sig alltjämt i en obruten uppåtgående trend. 500 som var ett starkt stöd, bröts dock, men 480 euro är ett annat starkt stöd.

Pris på raps enligt novemberterminen den 8 augusti 2012

Nedan ser vi kvoten mellan ICE (Canada) Canola (november) och Matif-rapsen. Canolapriset har räknats om till euro per ton.

Raps - Kvot mellan ICE Canola Matif

Vi ser att Matif-rapsen fallit i pris i relation till canolan. I slutet av förra året var premien över 10% för Matif. Nu ligger Matif på par med Canola och har till och med handlats till rabatt i början av augusti. Med tanke på att rapsen noteras i euro, som är svag, kan man tänka sig högre priser (i euro) framöver.

Gris

Decemberkontraktet på lean hogs har brutit ner och befinner sig nu i sjunkande trend.

Decembertermin på lean hogs - Prisdiagram

Mjölk

Priset på mjölkpulver i Nordeuropa har fortsatt att stiga kraftigt den senaste veckan. Förra veckan låg priset på Eurex i spotkontraktet på 2275 euro per ton. Nu har priset gått upp till 2450, vilket är närmare +8% på en vecka.

Pris på mjölkpulver i Europa

På den amerikanska börsen, där torkan som drabbat foderproduktionen är mycket allvarligare än i Europa, har priset rusat. Nedan ser vi decemberkontraktet. Konsolideringsfasen (en triangel) vid 19 cent per pund, har brutits. Kanske 20 cent kan noteras inom kort?

Terminspris på mjölk i USA

Socker

Priset på socker bröt stödet och föll från 22 ner till 21 i skrivande stund. 20 cent per pund är ett tekniskt stöd. Vi tror att priset ska ner och testa den nivån, kanske rentav bottennoteringen från juni på 18.86 cent.

Priset på socker bröt stödet - Diagram

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Analys

Surge in US crude inventories dampens bullish sentiment

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SEB - analysbrev på råvaror

Price action
Brent crude is currently trading at USD 81.4 per barrel, marking a decline from its February peak of USD 83.6 per barrel recorded yesterday (February 14th), representing a notable drop of 2.6% within a short span of time.

Ole R. Hvalbye,
Analyst Commodities, SEB
Ole R. Hvalbye, Analyst Commodities, SEB

This morning, crude prices continue to slide, following a larger-than-anticipated increase in US crude inventories (+12.0 million barrels) as reported in the US Petroleum Status Report (EIA). This uptick in inventories is attributed to a further decrease in refinery operations and a relatively softer demand for petroleum products.

Yesterday, crude prices flirted with January highs amidst geopolitical tensions in the Middle East and sustained production cuts by OPEC+. However, the surge in crude inventories observed recently, the most significant since November 2023, is tempering bullish sentiment. Notably, inventories at the ”key” Cushing, Oklahoma, exceeded expectations for this time of year (refer to page 2 in attachment).

Adding to the bearish sentiment is the widespread reduction in oil product inventories, primarily influenced by refinery outages rather than a substantial uptick in demand. Notably, US crude oil refinery inputs averaged 14.5 million barrels per day, marking a decrease of 297 thousand barrels per day compared to the previous week, with refineries operating at 80.6% of their capacity.

Recent market expectations suggest the likelihood of prolonged higher US interest rates due to persistent inflationary pressures, resulting in a stronger US dollar. This aspect contributes to weaker oil prices, as the cost of procuring oil in other currencies becomes relatively expensive, thereby impacting short-term demand dynamics.

Oil inventories

Changes in Inventories:
Crude Oil Excluding SPR: Commercial crude oil inventories (excluding SPR) increased notably by 12.0 million barrels, representing a 2.8% rise from the previous week, but still a substantial 6.8% decrease from the same period last year. However, the surge exceeds typical seasonal adjustments, indicating potential reduced crude demand, and a more well-balanced market.

Distillate: Distillate (diesel) fuel oil inventories declined by 1.9 million barrels, showcasing a 1.5% decrease from the prior week but a significant 5.4% increase compared to the same period last year (naturally from very low levels). The weekly drawdown contributed to a further decline compared to normal, and now distillate stocks remain approximately 7% below the five-year average for this time of year – indicating sustained demand or constrained production.

Gasoline: Total motor gasoline inventories witnessed a decrease of 3.7 million barrels, marking a 1.5% decline from the previous week but a modest 2.2% increase from the same period last year. This reduction aligns with seasonal expectations, albeit slightly exceeding typical adjustments.

Jet Fuel: Inventories of kerosene-type jet fuel increased by 0.1 million barrels, representing a minimal change of 0.2% from the prior week. However, compared to the same period last year, jet fuel inventories surged by 12.1%, indicative of potential shifts in air travel for the start of 2024.

Crude & Product Including SPR: Total petroleum stocks, inclusive of SPR, witnessed a modest increase of 5.9 million barrels, indicating a 0.4% rise from the prior week. However, compared to the same period last year, total stocks experienced a notable 2.4% decrease.

Crude & Product Excluding SPR: Excluding SPR holdings, total petroleum stocks increased by 5.2 million barrels, reflecting a 0.4% rise from the previous week but a 2.1% decrease compared to the same period last year. Despite the weekly increase, petroleum stocks remain below historical averages for this time of the year.

Supply and Demand:
Supply remained relatively stable, with domestic crude oil production and imports showing marginal fluctuations. However, net imports witnessed a notable decline, reflecting shifts in trade patterns and production capacities.

Demand for petroleum products witnessed a decline, as evidenced by product supplied figures. The declines in certain product categories suggest nuanced shifts in consumer behavior.

Exports and Imports:
Exports surged by 751 thousand barrels per day, indicating robust international demand for US petroleum products. Conversely, imports witnessed a decline of 437 thousand barrels per day.

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Analys

The EUA price could drop to EUR 40/ton and then be picked up by Airliners, Shipping and Utilities

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The EUA price is dropping hard along with a sharp decline in the front-year TTF nat gas contract. The typical last-round sell-off in EUA prices have typically been a final sell-off of 10-20-30%. From EUR 60/ton level it implies a price decline down to EUR 54; 48; 42/ton. The front-year nat gas price and the front-year Coal-to-Gas (C-t-G) differential is what has held the EUA price above EUR 60/ton. But if the TTF 2025 price falls down to EUR 27/ton the front-year C-t-G differential will fall all the way towards EUR 40/ton. That TTF 2025 falls to EUR 27/ton or lower seems likely to happen and the risk is high that the EUA price will be sucked down along with it. But nat gas demand is starting to come back with a lag in nat gas price declines in the EU but probably also in Asia. Thus first an over-sell in nat gas prices, then demand revival and then a rebound in both nat gas prices and EUA prices. Airliners, shipping companies and Utilities will probably buy as much EUAs they can get if the EUA price fall down towards EUR 40/ton.

Bjarne Schieldrop, Chief analyst commodities at SEB
Bjarne Schieldrop, Chief analyst commodities, SEB

Front-year 2025 TTF nat gas price falls hard and so does the EUA price. The front-month EUA price dropped 2.7% yesterday to EUR 58.97/ton and thus broke out of the sideways trend around EUR 61/ton since 18 January. Today it has sold off another 3.2% to EUR 57.1/ton.

Again it is the nat gas price which is leading the way and more specifically it is about the front-year nat gas which lost 1.9% on Wednesday and another 2.5% again ydy to a close of EUR 30.65/MWh and today it has solf off 2.8% to EUR 29.8/ton.

The EUA price has very clearly been balancing on the front-year Coal-to-Gas (C-t-G) differentials. The C-t-G differentials have been significantly lower than EUR 60/ton both at the front-end of the curve (1-2-3 month) and for calendars 2026 and 2027. But the front-year nat gas price has held up at around EUR 31/MWh quite well since around mid January. 

How far down will the EUA price go? The final sell-off could be down towards EUR 40/ton. With these dynamics the big question then becomes: How far down will the front-year nat gas contract sell? It will of course sell off too far as commodities always do. The reason commodities do this is the natural reactive chain of events which normally comes with a lag: First the price goes down before dropping hard in the final round of the sell-off. Then demand comes back with a lag to the price action. This again drives the price back up and off from the lows to a level consistent with the revival in demand. If demand instead had reacted immediately to lower prices then the hard drop at the end of the sell-off might not have happened.

Looking at previous hard, final sell-off-drops in the EUA price we can see that final drops typically have been 10-20-30% as the last final drop. If we take the EUR 60/ton as the starting point of this final drop, then we are talking an EUA price bottom of somewhere in the range of EUR 54; 48; 42/ton.

Global nat gas demand destruction in the face of very high nat gas prices solved the energy crisis. Let’s link this back to price action in nat gas. The reason why Europe has managed the recent energy crisis (Russia/Ukraine, nat gas,…) so surprisingly well is 1) Large reduction in nat gas demand in EU due to exceptionally high prices and 2) Significant demand destruction in Asia freeing up nat gas to flow to the EU. I.e. it was global demand destruction of nat gas in response to extremely high prices globally which solved the energy crisis. It was solved by the global market.

Demand for nat gas is starting to come back as the price falls. The nominal historical average nat gas TTF price was EUR 20/MWh from 2010 to 2019. But the real average was EUR 26/MWh. So seen from the eyes of consumers in both Europe and Asia, a price of EUR 26/MWh is an historically absolutely normal price. Demand for nat gas should thus naturally accelerate back towards normal levels at current nat gas prices. Not just in Europe, but also globally in all regions exposed to nat gas prices set by global LNG prices. This is already happening in the EU. Temp. adj. demand destruction vs. normal has typically been running at around 16% from mid-2022 to December 2023. Average ytd is 14% while the last 15 days is 9%. Demand destruction is fading as the price of nat gas is falling. But do remember that this is also happening in Asia but it is harder to track.

Normal nat gas demand AND normal gas prices is not consistent as Russian nat gas exports still down 1100 TWh/yr. There is however an inconsistency here in expecting normal prices and normal demand for natural gas now onward. The inconsistency is that the EU and thus the world is still robbed of the normal flow of nat gas on pipelines to Europe. This amounts to a loss of 3 TWh/day and thus close to 1100 TWh/year. When this gas is no longer flowing to the EU it isn’t flowing anywhere. It is lost to both the EU and the world. Until that is, Russia has built loads of new pipes to Asia and new LNG terminals. And that takes years.

A return to normal prices and normal demand while the world still is missing 1100 TWh/year of Russian nat gas isn’t really a consistent outcome in our view.

Demand for nat gas will continue to revive as the price of nat gas keeps falling. But both the EU and the world still need of a nat gas price at above normal levels to induce a certain amount of demand destruction until the point in time when new LNG export facilities globally has managed to replace the 1100 TWh/year we have lost from Russia.

Front-end TTF nat gas down to EUR 27/MWh could drive the EUA price to EUR 40/ton. The dynamic sell-off nat gas, prices will likely move lower than to the level which over time is consistent with continued need for some demand destruction globally.  This because demand revival will come with a lag to the decline in prices. It is thus fully plausible that the TTF 2025 contract moves all the way down to EUR 27/MWh (or maybe even lower). If so it would imply a 2025 C-t-G differential of only EUR 40/ton for the EUA price to balance on and reference to. That could be the final hard drop in the EUA price. That’s a 30% drop from EUR 60/ton. But it won’t last because that nat gas price is likely too low vs. what is needed globally to maintain some level of demand destruction for a while longer.

An EUA price of EUR 40/ton would also be too cheap to resist for a range of market participants and they’d likely jump in and purchase with both hands. Airliners and shipping companies which will have difficulties of shifting away from fossil fuels and will need EUAs for years to come. Also utilities could step in and purchase large amounts of EUAs even if forward margins are negative. Some EU based utilities with large fossil-based assets bought truckloads of EUAs from 2011 to 2017 when the EUA price ranged from EUR 3/ton to EUR 9/ton. For them the EUA certificate is not only a marginal cost. It is also a licence to operate. The EUA price will of course not return to that level again. But if we move to EUR 40-50/ton, then it will probably trigger strategic buying by shipping companies, airliners as well as utilities.

Front-year TTF nat gas TTF price is dropping and leading the EUA price lower after a period of sideways action since mid-Jan

Front-year TTF nat gas TTF price is dropping and leading the EUA price lower after a period of sideways action since mid-Jan
Source: SEB graph, Blbrg data

But the EU and the world is still missing some 3 TWh/d or 1100 TWh/yr of piped nat gas from Russia. When Russian nat gas is no longer flowing on pipes to Europe, it is flowing nowhere.

Natgas
Source: SEB graph, Blbrg data

Nat gas demand destruction in the EU has been running at 15% to 17%  since mid-2022 in the face of high nat gas prices. But demand destruction is now fading down to 8%. Demand has started to come back as nat gas prices fall. Demand is probably also coming back in Asia, but not so easily to see.

Nat gas demand destruction in the EU
Source: SEB graph and calculations, blbrg data

EU nat gas demand destruction has started to fade.

EU nat gas demand destruction has started to fade.
Source: SEB graph and calculations, Blbrg data

Forward Coal to Gas (C-t-G) differentials vs EUA market prices. The EUA price has balanced on the front-year differential. But that has now fallen like a rock along with the fall in front-year TTF nat gas price.  Lead the EUA into a free-fall

Forward Coal to Gas (C-t-G) differentials vs EUA market prices.

The front-year Coal-to-Gas differential is a distribution of crosses between many different levels of efficiencies for coal and nat gas power plants. Averages of these are EUR 52.4/ton with Coal at USD 94.3/ton and Nat gas at EUR 29.8/MWh (both front-year 2025 prices). So EUA price is still hanging high.

The front-year Coal-to-Gas differential
Source: SEB graph and calculations, Blbrg EUA market price
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Analys

Buying EUAs on the cheap will likely be one of the great opportunities of 2024

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There are certainly bearish forces at work in the EUA market currently. Spot-wise, yes, but current forward price curve dynamics also creates a bearish pressure. Not the least from the utility side which normally is the big forward buyer of EUAs. They can now buy back previous forward hedges which where they locked in positive forward power margins. The can now instead reverse these which means that they instead of buying EUAs forward will sell EUAs forward.

That said, the MSR mechanism in the EUA market basically ensures that any surplus EUA above 833 million ton in the TNAC (Total Number of Allowances in Circulation) is wiped out within 2-3 years. The medium term EUA market fundamentals in 2026/27 and beyond is thus mostly untouched of what is going on right now. Forward 2026/27 and onward fundamentals are thus still as strong as they were previously which calls for a minimum price of EUR 100/ton or more by that time-horizon.

The question is what will be the catalyst which will turn this around to bullish price action instead of current bearish price action. A return to positive, forward clean dark and clean spark spreads is one. Economic revival in Europe as nat gas prices now have come down almost to the real average gas price level from 2010 to 2019 is another. Strong buying from shipping as they have no free allocations on their hands and will need every single EUA they buy in the years to come. But also industry will need increasingly more EUAs in the years to come and could utilize the current slump in EUA prices. Investors could also dive in at price levels seen ”too low” versus medium-term fundamental prices. Though hedge funds rarely have time to wait 2-3 years for a revival. But at some point the difference between the EUA spot price and what is considered a fair EUA price level (given politics and forward EUA fundamentals) become too big and too tempting to resist for both speculators and users of EUAs 

Every year has unique opportunities in different types of assets, equities, currencies etc. We think that one of the great opportunities in 2024 when looked upon in hindsight, will be cheap EUAs. Thus those in need for EUAs in the years ahead should bid their time and pay attention to the opportunity currently playing out in the EU carbon market.

Since 17 January the front-month EUA price has ranged between an intraday low of EUR 59.12/ton and an intraday high of EUR 64.05/ton and with an average of closes of EUR 61.4/ton. The stabilization in the EUA price seems strongly related to the price development in the front-year TTF nat gas price which has stabilized at around EUR 32/MWh during the exact same period following a sharp price decline since early October last year.

The front-year TTF nat gas contract has stabilized at around EUR 32/MWh and the average year 2025 EUA price has stabilized for now around EUR 61/ton.

The front-year TTF nat gas contract
Source: SEB graph, blbrg data

But the EUA price may have halted around the EUR 60/ton mark for other reasons as well. One is that when politicians tightened up the EUA market with backloading (2014) and MSR (2019) the EUA price rallied on its own merits and ahead of the Coal-to-Gas differentials all the way up to EUR 60/ton in 2021. In September 2021 however the C-t-G differentials (implied price of EUAs by marginal power market dynamics in an EUA market which is not too tight and not too loose) rallied ahead and above the EUA price  due to the rally in nat gas prices. This then helped to drive the EUA price yet higher. The EUA price is now however back down at the crossover price of EUR 60/ton from September 2021 at which the EUA price previously was able to reach on its own merits (political tightening).

The average EUA front-year price in EUR/ton vs. the implied front-year C-t-G differential with 41% efficient coal and 54% efficient nat gas. The difference between the efficiency of 41% to 54% is not much different than the often used 36% vs 49%.

The average EUA front-year price in EUR/ton vs. the implied front-year C-t-G differential with 41% efficient coal and 54% efficient nat gas.
Source: SEB calculations and graph, Blrg data

The EUA price also seems to follow the front-year C-t-G differentials quite closely while the discrepancies widen out further out on the curve. Thus a further sharp decline in the front-year TTF nat gas price is probably needed dynamically to drive the EUA price yet lower.

The EUA price seems to be anchored to the front-year TTF nat gas price as well as the front-year Coal-to-Gas differentials. But further out on the curve the latter widens out. Either because of increasing market tightness or simply due to curve structures. There are no support from C-t-G differentials in the current forward curves for 2026 and 2027.

The EUA price
Source: SEB graph and calculations, Blbrg data

A serious element of weakness in the EUA market currently is that current forward clean power margins are negative. I.e. there is likely very limited amount of forward hedging by utilities as it doesn’t make sense for utilities to lock-in negative forward margins. Utilities are normally a large source of forward buying of EUAs and now there is probably close to nothing. And maybe even the opposite: Utilities may reverse previously entered hedges where they locked in forward positive margins and now instead can buy them back at favorable negative levels.

On a forward basis it costs more to produce power with Coal+CO2 or Gas+CO2 than it is possible to sell the power at on a forward basis.

On a forward basis it costs more to produce power with Coal+CO2 or Gas+CO2 than it is possible to sell the power at on a forward basis.
Source: SEB graph and calculations, Blbrg data

The following graph shows a ”utility hedging incentive index” which when positive indicates positive, clean forward coal and gas power margins with a weighting of 75%, 50% and 25% on the nearest Yr1, Yr2 and Yr3. Very strong and positive forward power margins since Jan 2019. The index crossed below the EUR 5/MWh margin October last year and now sits at a massive negative EUR 7.8/MWh at which Utilities are incentivised to revers their previous hedges and buy back previously sold power and then sell coal, gas and EUAs.

The EUA price vs. SEB’s Utility forward hedging incentive index. Now very negative. Potentially feeds EUA sales into the market from the Utility side.

The EUA price vs. SEB's Utility forward hedging incentive index.
Source: SEB calculations and graph, Blbrg data

There are thus certainly bearish forces at work in the EUA market currently. Both spot-wise but also current forward price curve dynamics creates a bearish pressure. Not the least from the utility side which normally is the big forward buyer of EUAs.

That said, the MSR mechanism in the EUA market basically ensures that any surplus EUA above 833 million ton in the TNAC (Total Number of Allowances in Circulation) is wiped out within 2-3 years. The medium term EUA market fundamentals in 2026/27 are thus mostly untouched of what is going on right now. Forward 2026/27 and onward fundamentals are thus still as strong as they were previously which calls for a minimum price of EUR 100/ton or more by that time-horizon.

The question is what will be the catalyst which will turn this around to bullish price action. Positive, forward clean dark and clean spark spreads is one. Economic revival in Europe as nat gas prices now have come down almost to the real average gas price level from 2010 to 2019. Strong buying from shipping as they have no free allocations on their hands and will need every single EUA the buy in the years to come. But also industry will need increasingly more EUAs in the years to come. Investors could also dive in at price levels seen ”too low” versus medium-term fundamental prices. Though hedge funds rarely have time to wait 2-3 years for a revival. But at some point the difference between the EUA spot price and what is considered a fair EUA price level (given politics and forward EUA fundamentals) become too big and too tempting to resist for both speculators and users of EUAs

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