Analys

A ”Game of Chicken”: How long do you dare to wait before buying?

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1 år sedan

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28 februari, 2024

The EUA market rallied 3.4% ydy and is adding another 0.5% this afternoon with EUA Dec-24 at EUR 54.2/ton. Despite the current bounce in prices we think that the ongoing sell-off in EUA prices still has another EUR 10/ton downside from here which will place the low-point of EUA Dec-24 and Dec-25 at around around EUR 45/ton. Rapidly rising natural gas inventory surplus versus normal and nat gas demand in Europe at 23% below normal will likely continue to depress nat gas prices in Europe and along with that EUA prices. The EUA price will likely struggle to break below the EUR 50/ton level, but we think it will break.

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

That said, our strong view is still that the deal of the year is to build strategic long positions in EUA contracts. These certificates are ”licence to operate” for all companies who are participants in the EU ETS irrespective whether it is industry, shipping, aviation or utilities. We have argued this strongly towards our corporate clients. The feedback we are getting is that many of them indeed are planning to do just that with board approvals pending. Issuance of EUAs is set to fall sharply from 2026 onward. The Market Stability Reserve (MSR) mechanism will clean out any surplus EUAs above 833 m t by 2025/26. Medium-term market outlook 2026/27 is unchanged and not impacted by current bearish market fundamentals with fair EUA price north of EUR 100/ton by then. Building strategic long position in EUAs in 2024 is not about pinpointing the low point which we think will be around EUR 45/ton, but instead all about implementing a solid strategic purchasing plan for EUAs for 2024.

The ingredients in the bottoming process will be: 1) Re-start of European industry as energy prices come down to normal, 2) Revival in nat gas demand as this happens, 3) Nat gas prices finding a floor and possibly rebounding a bit as this happens, 4) Asian nat gas demand reviving as nat gas now normally priced versus oil, 5) Strategic purchasing of EUA by market participants in the EU ETS, 6) Speculative buying of EUAs, 7) Bullish political intervention in H2-24 and 2025 as EU economies revive on cheap energy and politicians have 2024-elections behind them.

On #1 we now see calculations that aluminium smelters in Europe now are in-the-money but not restarted yet. On #2 we see that demand destruction (temp. adj.) in Europe is starting to fade a bit. On #3 we have not seen that yet. On #4 we see stronger flows of LNG to Asia. On #5 we see lots of our corporate clients planning to purchase strategically and finding current EUA prices attractive. On #6 it may be a bit early and so as well for #7.

For EU ETS participants it may be a ”Game of Chicken”: How long do you dare to wait before buying? Those who wait too long may find the carbon constrained future hard to handle.

Ydy’s short-covering rally lost some steam this morning before regaining some legs in the afternoon. The EUA Dec-24 ydy rallied 3.4% to EUR 53.97/ton in what looks like a short-covering-rally in both coal, nat gas, power and EUAs. This morning it gave almost all of the gains back again before regaining some strength in the afternoon to the point where it is now up at EUR 54.7/ton which is +1.4% vs. ydy. A weather forecast promising more seasonally normal temperatures and below normal winds could be part of the explanation.

The power market is currently the main driver and nat gas prices the most active agent. The main driver in the EUA market is the power market. When the EUA market is medium-tigh (not too loose and not too tight), then the EUA price will naturally converge towards the balancing point where the cost of coal fired electricity equals the cost of gas fired electricity. I.e. the EUA price which solves the equation: a*Coal_price + b*EUA_price = c*Gas_price + d*EUA_price where a, b, c and d are coefficients given by energy efficiency levels, emission factors and EURUSD fex forward rates. As highlighted earlier, this is not one unique EUA balancing price but a range of crosses between different efficiencies for coal power and gas power versus each other.

Coal-to-gas dynamics will eventually fade as price driver for EUAs but right now they are fully active. Eventually these dynamics will come to a halt as a price driver for the EUA price and that is when the carbon market (EU ETS) becomes so tight that all the dynamical flexibility to flex out of coal and into gas has been exhausted. At that point in time the marginal abatement cost setting the price of an EUA will move to other parts of the economy where the carbon abatement cost typically is EUR 100/ton or higher. We expect this to happen in 2026/27.

But for now it is all about the power market and the converging point where the EUA price is balancing the cost of Coal + CO2 equal to Gas + CO2 as described above. And here again it is mostly about the price of natural gas which has moved most dramatically of the pair Coal vs Gas.

Nat gas demand in Europe is running 23% below normal and inventories are way above normal. And natural gas prices have fallen lower and lower as proper demand recovery keeps lagging the price declines. Yes, demand will eventually revive due low nat gas prices, and we can see emerging signs of that happening both in Europe and in Asia, but nat gas in Europe is still very, very weak vs. normal. But reviving demand is typically lagging in time vs price declines. Nat gas in Europe over the 15 days to 25. Feb was roughly 23% below normal this time of year in a combination of warm weather and still depressed demand. Inventories are falling much slower than normal as a result and now stand at 63.9% vs. a normal 44.4% which is 262 TWh more than normal inventories.

Bearish pressure in nat gas prices looks set to continue in the short term. Natural gas prices will naturally be under pressure to move yet lower as long as European nat gas demand revival is lagging and surplus inventory of nat gas keeps rising rapidly. And falling front-end nat gas prices typically have a guiding effect on forward nat gas prices as well.

Yet lower nat gas prices and yet lower EUA prices in the near term most likely. Nat gas prices in Europe will move yet lower regarding both spot and forwards and the effect on EUA will be continued bearish pressure on prices.

EUA’s may struggle a bit to break below the EUR 50/ton line but most likely they will. EUA prices will typically struggle a bit to cross below EUR 50/ton just because it is a significant number. But it is difficult to see that this price level won’t be broken properly as the bearish pressure continues from the nat gas side of the equation. Even if nat gas prices comes to a halt at current prices we should still see the EUA price break below the EUR 50/ton level and down towards EUR 45/ton for Dec-24 and Dec-25.

The front-year nat gas price is the most important but EUA price should move yet lower even if it TTF-2025 stays unchanged at EUR 27.7/ton. The front-year is the most important for the EUA price as that is where there is most turnover and hedging. The following attractors for the EUA forward prices is with today’s TTF forward price curve (TTF Cal-2025 = EUR 27.7/ton) and today’s forward EURUSD FX curve and with ydy’s ARA coal closing prices. What it shows is that the forward EUA attractors are down at EUR 45/ton and lower.

Annons

The front-year Coal-to-Gas differential is the most important ”attractor” for the EUA price (Cal-2025 = average of Dec-24 and Dec-25) and that is down to around EUR 45/ton with a TTF Cal-2025 price of EUR 27.7/ton. The bearish pressure on EUA prices will continue as long as the forward nat gas prices are at these price levels or lower.

And if we take the EUA attractors from all the different energy efficiency crosses between coal and gas then we get an average attractor of EUR 44.2/ton for EUA Cal-2025 (= average of Dec-24 and Dec-25) versus a market price today of EUR 53.9/ton.

Calculating all the energy efficiency crosses between coal and gas power plants with current prices for coal and nat gas for 2025 we get an average of EUR 44.2/ton vs an EUA market price of EUR 53.9/ton. Bearish pressure on EUAs will continue as long as this is the case.

Utility hedging incentive index still deeply negative: Utilities have no incentive currently to buy coal, gas and EUAs forward and sell power forward against it as these forward margins are currently negative => very weak purchasing of EUAs from utilities for the time being.

Natural gas in Europe for different periods with diff between actual and normal decomposed into ”price effect” and ”weather effect”. Demand last 15 days were 23% below normal!

Natural gas demand in Europe — Source: SEB calculations and graph, Blbrg data

Natural gas inventories in Europe vs the 2014-2023 average. Surplus vs. normal is rising rapidly.

Nat gas inventories in Europe at record high for the time of year. Depressing spot prices more and more. Nat gas prices are basically shouting: ”Demand, demand, where are you?? Come and eat me!”

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Unusual strong bearish market conviction but OPEC+ market strategy is always a wildcard

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Brent crude falls with strong conviction that trade war will hurt demand for oil. Brent crude sold off 2.4% yesterday to USD 64.25/b along with rising concerns that the US trade war with China will soon start to visibly hurt oil demand or that it has already started to happen. Tariffs between the two are currently at 145% and 125% in the US and China respectively which implies a sharp decline in trade between the two if at all. This morning Brent crude (June contract) is trading down another 1.2% to USD 63.3/b. The June contract is rolling off today and a big question is how that will leave the shape of the Brent crude forward curve. Will the front-end backwardation in the curve evaporate further or will the July contract, now at USD 62.35/b, move up to where the June contract is today?

Bjarne Schieldrop, Chief analyst commodities, SEB

The unusual ”weird smile” of Brent forward curve implies unusual strong bearish conviction amid current prompt tightness. the The Brent crude oil forward curve has displayed a very unusual shape lately with front-end backwardation combined with deferred contango. Market pricing tightness today but weakness tomorrow. We have commented on this several times lately and Morgan Stanly highlighted how unusual historically this shape is. The reason why it is unusual is probably because markets in general have a hard time pricing a future which is very different from the present. Bearishness in the oil market when it is shifting from tight to soft balance usually comes creeping in at the front-end of the curve. A slight contango at the front-end in combination with an overall backwardated curve. Then this slight contango widens and in the end the whole curve flips to full contango. The current shape of the forward curve implies a very, very strong conviction by the market that softness and surplus is coming. A conviction so strong that it overrules the present tightness. This conviction flows from the fundamental understanding that ongoing trade war is bad for the global economy, for oil demand and for the oil price.

Will OPEC+ switch to cuts or will it leave balancing to a lower price driving US production lower? Add of course also in that OPEC+ has signaled that it will lift production more rapidly and is currently no longer in the mode of holding back to keep Brent at USD 75/b due to an internal quarrel over quotas. That stand can of course change from one day to the next. That is a very clear risk to the upside and oil consumers around should keep that in the back of their minds that this could happen. Though we are not utterly convinced of the imminent risk of this. Before such a pivot happens, Iraq and Kazakhstan probably have to prove that they can live up to their promised cuts. And that will take a few months. Also, OPEC+ might also like to see where the pain-point for US shale oil producers’ price-vise really is today. So far, we have seen no decline in the number of US oil drilling rigs in operation which have steadily been running at around 480 rigs.

With a surplus oil market on the horizon, OPEC+ will have to make a choice. How shale this coming surplus be resolved? Shall OPEC+ cut in order to balance the market or shall lower oil prices drive pain and lower production in the US which then will result in a balanced market? Maybe it is the first or maybe the latter. The group currently has a bloated surplus balance which it needs to slim down at some point. And maybe now is the time. Allowing the oil price to slide. Economic pain for US shale oil producers to rise and US oil production to fall in order to balance the market and make room OPEC+ to redeploy its previous cuts back into the market.

Surplus is not yet here. US oil inventories likely fell close to 2 mb last week. US API yesterday released indications that US crude and product inventories fell 1.8 mb last week with crude up 3.8 mb, gasoline down 3.1 mb and distillates down 2.5 mb. So, in terms of a crude oil contango market (= surplus and rising inventories) we have not yet moved to the point where US inventories are showing that the global oil market now indeed is in surplus. Though Chinese purchases to build stocks may have helped to keep the market tight. Indications that Saudi Arabia may lift June Official Selling Prices is a signal that the oil market may not be all that close to unraveling in surplus.

The low point of the Brent crude oil curve is shifting closer to present. A sign that the current front-end backwardation of the Brent crude oil curve is about to evaporate.

Brent crude versus US Russel 2000 equity index. Is the equity market too optimistic or the oil market too bearish?

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Oil demand at risk as US consumers soon will face hard tariff-realities

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Muted sideways trading. Brent crude traded mostly sideways last week, but due to a relatively strong close on the Friday before, it ended the week down 1.6% at USD 66.87/b with a high-low range of USD 65.29 – 68.65/b. So muted price range action. Brent crude is trading marginally higher, up 0.3%, this morning amid mixed equity and commodity markets.

Strong Chinese buying in April as oil prices dipped. Chinese imports of crude continued to accelerate in April following a surge in March with data from Kepler indicating that Chinese imports averaged near 11 mb/d in April. That is an 18mth high and strongly up versus only 8.9 mb/d in January (FT.com today). That has most certainly helped to stem the rot in the oil price which bottomed at an intraday low of USD 58.4/b on 9 April. It has probably also helped to keep the front-end of the Brent crude oil forward curve in consistent backwardation. The strong buying from China is both opportunistic stockpiling due to the price slump but also rebuilding of oil inventories in general.

Oil speculators are cautious with oil demand at risk as US consumers soon will face hard tariff-realities. But oil market speculators are far from bullish. While net long speculative positions are up 52.2 mb over the week to last Tuesday, it is still only the 15th lowest speculative positioning over the past 52 weeks. The underlying concern is of course the US tariffs which is crippling exports of goods from China to the US with bookings of container freight down by 30% according to Hapag-Lloyd. Bloomberg’s Chief US economist, Anna Wong, is saying that empty shelves in US shops will soon be the reality. Thus US-China trade relations need to be fixed quickly to avoid hard realities for US consumers. The lead-times are long and the current tariffs and uncertainty around these is now risking availability for US consumer goods for the holiday seasons in H2-25. Tariff realities for US consumers are increasingly just around the corner. ”Rubber will hit the road” very soon and that is when we might see weaker oil demand as well.

Brent crude traded mostly sideways last week though ended down 1.6% in the end.

Net long speculative positions in Brent and WTI up 52.2 mb over week to last Tuesday but still at 15-week low over past 52 weeks.

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Brent crude is now trading below its nominal 2018-19 average in EUR/barrel terms

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6 dagar sedan

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25 april, 2025

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Brent crude gained a meager 0.65% yesterday with a close of USD 66.55/b. That was not much given that US equity markets rallied 2% yesterday with Nasdaq now is almost back to its pre ”Liberation Day” level. Brent crude is trading unchanged this morning with little impulse to do anything it seems.

Equity markets have gotten a boost along with easing US tariff rhetoric. The Brent crude oil price has however not gotten the same rebound and is today still trading USD 8.5/b lower than its USD 75/b level from 2 April.

Two factors at hand here: Expectations of softer growth and more oil from OPEC+. One is that global growth in 2025 will still take a hit with softer growth and thus softer oil demand growth due to the US tariff-turmoil. Even if rhetoric has eased. The second is that OPEC+ has upped its production plans with a softer market as a result going forward. The latter message to the market happened almost at the same time as the ”Liberation Day” on 2 April.

Spot market still as tight as it was on 2 April. Still, the front-end market is more or less equally tight today as it was on 2 April. The average Brent, WTI and Dubai 1-3mth time-spread is USD 1.4/b today versus USD 1.5/b on 2. April.

The market setup/pricing is thus that the market is still tight, but that surplus will come. Either because global growth will slow due to US Tariff-turmoil or because OPEC+ will add more barrels.

Will OPEC+ resolve its internal quarrels? Worth remembering on the latter is that the latest more aggressive OPEC+ production growth plan is due to internal quarrels over quota breaches by Iraq and Kazakhstan. OPEC+ could potentially ease those growth plans just as quickly if the internal quarrel is resolved.

Brent crude in EUR/barrel is now trading at the nominal level from 2018-2019. That is nominal! Not taking account of any kind of inflation which cumulatively is up 20-30% since primo 2018. The average, nominal Brent crude oil price in 2018-2019 was EUR 59.1/b. The front-month Brent crude oil price is now EUR 58.4/b. And Brent forward 36mth is only EUR 55.5/b and in real terms one could subtract some 5-10% for the next three years from that nominal forward price. Quite sweet for consumers!

Brent has rebounded along with equities (here US Russel 2000 index in orange), but the rebound in oil has become more hesitant the latest days. Brent still trading USD 8.5/b below its pre ”Liberation Day” of USD 75/b

Brent crude forward curves. Today versus 2 April (’Liberation Day’). Still a tight current market but now with expectation that surplus is coming.

The Brent crude oil price versus the average Brent, WTI and Dubai 1-3mth time-spread. The latter is today on par with where it was on 2 April while the Brent 1mth price is down USD 8.5/b.

Brent crude in EUR/b is down to its 2018-2019 nominal price level. Not bad for euro-based oil consumers!!

Yearly averages for Brent crude in EUR/barrel. The Brent 1mth in EUR/barrel is today trading below its nominal average from 2018-2019 of EUR 59.1/b. And 36mth forward Brent is trading at only EUR 55.5/b. And that is nominally both ways. Add in some 20-30% inflation since primo 2018 and 5-10% additional inflation next three years. Think real terms!