Analys

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

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1 år sedan

den

7 februari, 2024

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.

Ole R. Hvalbye, Analyst Commodities, SEB

Bjarne Schieldrop, Chief analyst commodities, SEB — Ole R. Hvalbye, Analyst Commodities, SEB

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.

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 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.

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.

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.

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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Analys

Breaking some eggs in US shale

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2 dagar sedan

den

5 augusti, 2025

Redaktionen

Lower as OPEC+ keeps fast-tracking redeployment of previous cuts. Brent closed down 1.3% yesterday to USD 68.76/b on the back of the news over the weekend that OPEC+ (V8) lifted its quota by 547 kb/d for September. Intraday it traded to a low of USD 68.0/b but then pushed higher as Trump threatened to slap sanctions on India if it continues to buy loads of Russian oil. An effort by Donald Trump to force Putin to a truce in Ukraine. This morning it is trading down 0.6% at USD 68.3/b which is just USD 1.3/b below its July average.

Only US shale can hand back the market share which OPEC+ is after. The overall picture in the oil market today and the coming 18 months is that OPEC+ is in the process of taking back market share which it lost over the past years in exchange for higher prices. There is only one source of oil supply which has sufficient reactivity and that is US shale. Average liquids production in the US is set to average 23.1 mb/d in 2025 which is up a whooping 3.4 mb/d since 2021 while it is only up 280 kb/d versus 2024.

Taking back market share is usually a messy business involving a deep trough in prices and significant economic pain for the involved parties. The original plan of OPEC+ (V8) was to tip-toe the 2.2 mb/d cuts gradually back into the market over the course to December 2026. Hoping that robust demand growth and slower non-OPEC+ supply growth would make room for the re-deployment without pushing oil prices down too much.

From tip-toing to fast-tracking. Though still not full aggression. US trade war, weaker global growth outlook and Trump insisting on a lower oil price, and persistent robust non-OPEC+ supply growth changed their minds. Now it is much more fast-track with the re-deployment of the 2.2 mb/d done already by September this year. Though with some adjustments. Lifting quotas is not immediately the same as lifting production as Russia and Iraq first have to pay down their production debt. The OPEC+ organization is also holding the door open for production cuts if need be. And the group is not blasting the market with oil. So far it has all been very orderly with limited impact on prices. Despite the fast-tracking.

The overall process is nonetheless still to take back market share. And that won’t be without pain. The good news for OPEC+ is of course that US shale now is cooling down when WTI is south of USD 65/b rather than heating up when WTI is north of USD 45/b as was the case before.

OPEC+ will have to break some eggs in the US shale oil patches to take back lost market share. The process is already in play. Global oil inventories have been building and they will build more and the oil price will be pushed lower.

A Brent average of USD 60/b in 2026 implies a low of the year of USD 45-47.5/b. Assume that an average Brent crude oil price of USD 60/b and an average WTI price of USD 57.5/b in 2026 is sufficient to drive US oil rig count down by another 100 rigs and US crude production down by 1.5 mb/d from Dec-25 to Dec-26. A Brent crude average of USD 60/b sounds like a nice price. Do remember though that over the course of a year Brent crude fluctuates +/- USD 10-15/b around the average. So if USD 60/b is the average price, then the low of the year is in the mid to the high USD 40ies/b.

US shale oil producers are likely bracing themselves for what’s in store. US shale oil producers are aware of what is in store. They can see that inventories are rising and they have been cutting rigs and drilling activity since mid-April. But significantly more is needed over the coming 18 months or so. The faster they cut the better off they will be. Cutting 5 drilling rigs per week to the end of the year, an additional total of 100 rigs, will likely drive US crude oil production down by 1.5 mb/d from Dec-25 to Dec-26 and come a long way of handing back the market share OPEC+ is after.

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Analys

More from OPEC+ means US shale has to gradually back off further

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3 dagar sedan

den

4 augusti, 2025

Redaktionen

The OPEC+ subgroup V8 this weekend decided to fully unwind their voluntary cut of 2.2 mb/d. The September quota hike was set at 547 kb/d thereby unwinding the full 2.2 mb/d. This still leaves another layer of voluntary cuts of 1.6 mb/d which is likely to be unwind at some point.

Higher quotas however do not immediately translate to equally higher production. This because Russia and Iraq have ”production debts” of cumulative over-production which they need to pay back by holding production below the agreed quotas. I.e. they cannot (should not) lift production before Jan (Russia) and March (Iraq) next year.

Argus estimates that global oil stocks have increased by 180 mb so far this year but with large skews. Strong build in Asia while Europe and the US still have low inventories. US Gulf stocks are at the lowest level in 35 years. This strong skew is likely due to political sanctions towards Russian and Iranian oil exports and the shadow fleet used to export their oil. These sanctions naturally drive their oil exports to Asia and non-OECD countries. That is where the surplus over the past half year has been going and where inventories have been building. An area which has a much more opaque oil market. Relatively low visibility with respect to oil inventories and thus weaker price signals from inventory dynamics there.

This has helped shield Brent and WTI crude oil price benchmarks to some degree from the running, global surplus over the past half year. Brent crude averaged USD 73/b in December 2024 and at current USD 69.7/b it is not all that much lower today despite an estimated global stock build of 180 mb since the end of last year and a highly anticipated equally large stock build for the rest of the year.

What helps to blur the message from OPEC+ in its current process of unwinding cuts and taking back market share, is that, while lifting quotas, it is at the same time also quite explicit that this is not a one way street. That it may turn around make new cuts if need be.

This is very different from its previous efforts to take back market share from US shale oil producers. In its previous efforts it typically tried to shock US shale oil producers out of the market. But they came back very, very quickly.

When OPEC+ now is taking back market share from US shale oil it is more like it is exerting a continuous, gradually increasing pressure towards US shale oil rather than trying to shock it out of the market which it tried before. OPEC+ is now forcing US shale oil producers to gradually back off. US oil drilling rig count is down from 480 in Q1-25 to now 410 last week and it is typically falling by some 4-5 rigs per week currently. This has happened at an average WTI price of about USD 65/b. This is very different from earlier when US shale oil activity exploded when WTI went north of USD 45/b. This helps to give OPEC+ a lot of confidence.

Global oil inventories are set to rise further in H2-25 and crude oil prices will likely be forced lower though the global skew in terms of where inventories are building is muddying the picture. US shale oil activity will likely decline further in H2-25 as well with rig count down maybe another 100 rigs. Thus making room for more oil from OPEC+.

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Analys

Tightening fundamentals – bullish inventories from DOE

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1 månad sedan

den

26 juni, 2025

Redaktionen

The latest weekly report from the US DOE showed a substantial drawdown across key petroleum categories, adding more upside potential to the fundamental picture.

Commercial crude inventories (excl. SPR) fell by 5.8 million barrels, bringing total inventories down to 415.1 million barrels. Now sitting 11% below the five-year seasonal norm and placed in the lowest 2015-2022 range (see picture below).

Product inventories also tightened further last week. Gasoline inventories declined by 2.1 million barrels, with reductions seen in both finished gasoline and blending components. Current gasoline levels are about 3% below the five-year average for this time of year.

Among products, the most notable move came in diesel, where inventories dropped by almost 4.1 million barrels, deepening the deficit to around 20% below seasonal norms – continuing to underscore the persistent supply tightness in diesel markets.

The only area of inventory growth was in propane/propylene, which posted a significant 5.1-million-barrel build and now stands 9% above the five-year average.

Total commercial petroleum inventories (crude plus refined products) declined by 4.2 million barrels on the week, reinforcing the overall tightening of US crude and products.