Energy Commodity Report: February 8, 2011

All prices unless otherwise stated are for the close of February 7.
2012 baseload German power: €51.75/MWh, down 1.71%
2012 CIF ARA Coal: €117.40/t, down 1.08%
Front-month UK natural gas: GBp54.50/therm, down 0.37%
EU emission allowances (EUAs) for December 2011 delivery: €14.64/t, down 0.48%
Certified Emission Reduction(s) (CERs) for December 2011 delivery: €11.22/t, down 1.06%
Brent crude oil futures for front-month 2010 delivery: US$99.83/bbl, up 0.6% as of GMT 08:45, February 8
WTI crude oil futures for front-month 2010 delivery: US$87.54/bbl, up 0.1%, as of GMT 08:45 February 8

Latest buzz

US sweet light crude for March delivery finished Monday’s session down US$1.55, or 1.7%, at US$87.48/bbl on the NYMEX, while Brent crude drifted down by 0.58% to settle at US$99.25/bbl. Both contracts appear to be affected by the lingering uncertainty over the future of Egypt, but as time goes on, the likelihood of chaos capable of disrupting the movement of oil tankers through the Suez Canal seems to be receding, particularly given that opposition leaders are in talks with the current regime. Today is expected to see little movement on the markets, until the American Petroleum Institute releases its weekly oil inventory and even then traders are unlikely to take large numbers of long positions, until the release of  the EIA’s “This Week in Petroleum” report tomorrow.

Natural gas futures fell for a third consecutive session in New York, hitting a six-week low in the process. Gas for March delivery fell by US¢20.6, or 4.8%, to settle at US$4.104/mBtu, in response to forecasts predicting that the current cold weather over much of the US will start to lift at the weekend, reducing heating demand. The situation has prompted some to speculate that prices could drop to around US$3.50/mBtu if a thaw gets underway in the run-up to March. Baker Hughes Inc has reported that there were 911 rigs drilling for natural gas in the US last week, down two from the previous week, but up 3.8% on year. Meanwhile, Barclays Capital is predicting that average US gas output will be 2.5bnft³pd above the levels seen in 2010.

A US$3-4/t fall in prompt physical coal prices has been attributed to the cancellation of planned strike action by workers at Cerrejon, Colombia’s largest coal exporter. However, market participants had largely discounted the potential for disruption, given that the company was expected to reach a deal. A new pay deal is expected to be signed today. Some traders have argued that the current lack of demand is a more important factor behind the decline in prices, with Chinese demand having been conspicuously lacking since December and now weighed down by the New Year celebrations. Meanwhile, India traders have been reselling some South African cargoes and looking to Indonesia to make up any shortfall.

After making initial gains, the Dec11 EUA contract hit an intraday high of €14.77/t, before spending the rest of the day in retreat, due to Brent’s decline below US$100/bbl, coupled with lower coal prices and the subsequent drop in the 2012 baseload German power contract.

CER futures fell back alongside EUAs, with the Dec11 and Dec12 contract giving up 1.06% and 0.9%, respectively. The Dec11 CER-EUA spread widened by €0.05 to -€3.42, while the Dec12 CER-EUA spread increased by €0.03 to finish at -€4.11. Japan has announced that it is intending to spend around US$13bn to meet its obligations under the Kyoto protocol, but as yet the government has yet to release any further details and the number of carbon credits it is intending to buy. However, any purchases are expected to come from the US$5.6bn it has allocated for emissions reductions.

Meanwhile, China is expected to institute a new environmental tax on heavy polluters next month, as part of an ambitious five-year plan to tackle the environmental damage wrought by several decades of rapid economic growth. According to sources, a carbon tax is being debated and may be included in the system at a later stage. China already has a system of fines for pollution, but they are low and inadequately enforced by local environmental bureaus. The five-year plan is expected to declare energy efficiency and environmental services to be “priority industries,” while CNY3tn (US$455bn) will be spent on environmental protection, double that seen over the 2006-10 period. In addition, a carbon intensity target, is expected to be set at around 16%.

South Korea will begin carbon emission trading between 2013 and 2015, according to Kim Sang-hyop, a secretary to the President, for green growth, despite strong opposition from industry against a 2013 start. A revised bill that will be presented to parliament later this month, will increase the percentage of free carbon allowances above the initially proposed figure of 90%, but it will not go as high as 100%. A three-phase cap-and-trade scheme is expected with the first running from 2013 to 2015, then two subsequent five-year phases. A petition from businesses has warned that the scheme could cost South Korean manufacturers up to KRW14tn (US$12.57bn) if 100% of credits were eventually auctioned.