Commodities: Oil rises on Asian stock market gains, Bahrain; EUAs and CERs advance to two year high

All prices unless otherwise stated are for the close of March 15.
2012 baseload German power: €58.16/MWh, up 5.73%
2012 CIF ARA Coal: €129.03/t, up 2.13%
Front-month UK natural gas: GBp65.10/therm, up 3.17%
EU emission allowances (EUAs) for December 2011 delivery: €17.21/t, up 3.67%
Certified Emission Reduction(s) (CERs) for December 2011 delivery: €13.06/t, up 5.24%
Brent crude oil futures for front-month 2010 delivery: US$109.96/bbl, up 1.3%, as of 10:45 GMT, March 16
WTI crude oil futures for front-month 2010 delivery: US$98.48/bbl, up 0.9%, as of 10:45 GMT, March 16

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The oil markets are likely to focus on the situation currently unfolding in Bahrain, where the government has declared a three-month state of emergency and clashes between heavily armed police and protesters have resulted in several deaths on both sides. While the Kingdom’s oil production is not sufficient for potential threats against it to rattle the international markets, its close proximity to Saudi Arabia and the fact that both countries are minority Sunni monarchies ruling over a disadvantaged Shiite majority are a cause for concern.

Sweet light crude for April delivery on the NYMEX dropped by US$4.01 to settle at US$97.18/bbl on Tuesday, while front month ICE Brent Crude finished the day at US$108.52/bbl. Today has seen both contracts rise due to corrections in Asian share markets after the sharp losses seen in previous sessions. A Dow Jones poll is predicting that the EIA will today announce a 1.1mbbl rise in US crude inventories, together with 1.8mbbl and 1.5mbbl draw-downs in gasoline and distillate stockpiles. The American Petroleum Institute has said that crude inventories rose by 91,000bbl, those of distillates increased by 531,000bbl and gasoline stockpiles dropped by 458,000bbl.

The IEA has said that Libyan oil production has slowed “to a trickle” compared to the 1.58mbpd seen before the crisis. It also has warned that oil exports from the embattled country are likely to stay offline for “months rather than weeks” due to a combination of “war-inflicted damage on oil infrastructure” and a tightening of the international sanctions regime. The agency put Saudi oil output at 9.1mbpd at the end of February, up from the 8.5mbpd seen in December. The UAE and Kuwait have both boosted their production by around 100,000bpd. Given that the UN has voted against military intervention in Libya, with strong opposition from Germany, Russia and China once the Libyan oil sector recovers, there is a strong possibility that more of its oil will be headed east and away from countries such as the UK and France which have pressed for a no-fly zone over Libya.

The IEA has cut its forecast for global oil demand growth in 2011 to 1.44mbpd, due to the crisis currently unfolding in Japan. It also has warned that the situation in Libya might have more impact on the oil market once the refinery maintenance season in the Atlantic Basin comes to an end in April, a change typically associated with a 1mbpd boost in oil demand. Global refinery runs are expected to hit a seasonal low of 73mbpd this month before rising to 75.3mbpd in June.

Shell’s CEO, Peter Voser told Reuters Insider TV yesterday that the company is targeting 3.7mbpd boe production for 2014 and is expecting to invest over US$100bn in the 2011-2014 period. In response to a question regarding the future trajectory of oil prices, he said that: “I think we see both, which is really a rising oil price over time but also a rising gas price over time…  Energy demand is growing so fast over the next few decades, we will always be struggling to keep supply actually growing in order to deliver those barrels, either oil or gas.”

Indonesia has said that it could potentially deliver 59 extra LNG cargoes to Japan this year, should the extra volumes be required to compensate for the loss of nuclear power capacity caused by the earthquake last week. An official said that if asked, the country would be willing to renegotiate for the diversion of 45 cargoes from South Korea to Japan, with the remaining 14 cargoes coming from a stock of 20 that the government was looking to offer on the spot market. Six of these have already sold. One cargo is equivalent to 120,000m³ of LNG. Indonesia delivered 480 cargoes to Japan in 2010 and is one of Japan’s largest suppliers of the fuel.

Carbon futures rose to a new two-year high after Germany’s government chose to suspend its nuclear power plant lifetime extension programme for three months. The decision could potentially affect 15% (4.9GW) of the country’s generating capacity and may also have a knock-on impact on new nuclear build across Europe. The Dec11 EUA contract rose to an intraday high of €17.49/t, before settling at €17.21/t. The EU has said that it is expecting to offer 120m Phase III EUAs in early 2012 auctions. The suspension of the lifetime extension programme helped drive coal, natural gas and German baseload power prices higher, with the latter rising by an impressive 5.73% to settle at €58.16/MWh.

The news from Germany and Japan has also boosted European coal futures, with a DES ARA coal cargo for June delivery trading at US$129/t, while Richards Bay coal for 3Q2011 delivery rose to US$125/t, up three dollars since the Japanese earthquake. The fact that Japanese coal-fired power plants are already working at full capacity will limit the potential upside for coal in the Asia Pacific.

Chinese coal production in February rose by 20% YoY in February to 247.5Mt, according to the National Bureau of Statistics. The General Administration of Customs has reported that Chinese coal exports in February amounted to 1.76Mt, up 8.6% YoY. Total coal imports in the same month fell by 47.6% on year to 6.76Mt. The decline has been attributed to a shorter month combined with the week-long Lunar New Year holiday.

In a reversal from the previous session, CERs outperformed their EUA counterparts, with the Dec11 contract rising by 5.25% to finish at €13.06, while longer-dated contracts rose by 6-6.42%. As a consequence, the Dec11 and Dec12 CER-EUA spreads both narrowed, finishing Tuesday’s session at -€4.15 and -€4.92, respectively. The Japanese government has said that it will not make a decision as to whether it will declare force majeure on its obligations under the Kyoto protocol for several weeks. Japanese carbon emissions are expected to rise sharply due to the shut down of a large chunk of its nuclear reactor fleet.