Commodities: Oil hit by Mubarak’s exit, market awaits Chinese inflation data, carbon buoyed by expected new EU emissions target

All prices unless otherwise stated are for the close of February 11.
2012 baseload German power: €52.55/MWh, up 0.97%
2012 CIF ARA Coal: €117.55/t, up 1.10%
Front-month UK natural gas: GBp53.50/therm, up 0.94%
EU emission allowances (EUAs) for December 2011 delivery: €14.89/t, up 1.36%
Certified Emission Reduction(s) (CERs) for December 2011 delivery: €11.38/t, up 1.25%
Brent crude oil futures for front-month 2010 delivery: US$100.97/bbl, up 0.0% as of GMT 09:00, February 14
WTI crude oil futures for front-month 2010 delivery: US$85.16/bbl, down 0.4%, as of GMT 09:00 February 14

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Oil prices hit a 10-week low on Friday as support from the Egypt crisis evaporated after Hosni Mubarak resigned as president. US crude for March delivery settled US$1.15 lower at US$85.58/bbl on the NYMEX, while Brent crude for April delivery closed at US$100.94/bbl. Additional downward pressure came from a stronger US dollar.  The premium commanded by Brent is currently just shy of US$16, thanks to lingering oversupply at Cushing and tightness in the North Sea market and is expected to persist, given that it will take years before new pipelines come onstream to deliver WTI to additional markets in the US and the fact that its higher price and the high cost to traders of rolling WTI contract from month to month, is increasing Brent’s appeal to speculative investors.

Although there remain concerns that unrest may spread throughout North Africa and the Middle East, the resolution of the situation in Egypt has caused traders to focus on market fundamentals, particularly upcoming US economic data and Chinese inflation figures, which are due to be released on Tuesday. Analysts polled by Reuters are expecting inflation to rise to 5.3% from 4.6%. It is worth noting that some of the risk premium levied by the Egypt situation is still being retained by Brent crude, given the uncertainty surrounding what form the post-Mubarak political system will take.

US natural gas prices fell to a fresh 12-week low, as forecasts for warmer mid-month weather continued to drive down expectations for future heating demand. Natural gas for March delivery gave up US¢7.6, or 1.9% to settle at US$3.910/mBtu on the NYMEX, the lowest settlement since November 16 and bringing the contract’s weekly loss to 9.2%. MDA EarthSat is expecting warmer-than-average temperatures across the Southwest through to the Rocky Mountain states and the Upper Midwest this weekend, with the balmy weather spreading to the eastern two-thirds of the country afterwards. Natural gas inventories for the week ended February 4, stood at 2.144tnft³, 2.1% above the five-year average, while the number of rigs drilling for natural gas in the US dropped by five to 906, this week, according to Baker Hughes. The EIA is currently expecting US natural gas output to grow by 0.8% this year, while consumption is forecast to grow by 0.3%, putting further pressure on prices and margins for producers.

The Federation of Electrical Power Companies of Japan has reported that its members generated 92,280GWh of electricity in January, a record for the month and up 5.8% on year, due to a combination of healthy industrial demand and the coldest weather seen for the month since 1986, coupled with a drop in the Japanese nuclear run-rate to 66.1%, from 70.8% a year earlier. The strong demand for electricity caused the utilities to burn 748,606kl of fuel compared with 502,220kl in January 2010. Thermal coal consumption rose to 5.21Mt from 4.55Mt. Thermal power output rose by 17%, while nuclear output fell by 10%. Japanese GDP fell by an annualised rate of 1.1% in 4Q10, partly due to the expiry of car subsidies, a new tax on tobacco products and a strong yen which has hit the competitiveness of the country’s exports.

Gazprom has said that it expects to see European natural gas prices rise by 15% this year and projects a 9% increase in supply. In a presentation given to analysts and investors on February 11, Russia’s natural gas company, said that the average price will probably rise to US$352/1000m³ this year from the US$306/1000m³ seen in 2010. The increase will come from the fact that Russian gas is principally sold to Europe via long-term oil-linked contracts and the 39% gain in Brent crude prices seen in the past year. Gazprom’s deliveries to Europe fell to 140.6bnm³ in 2009 down from the 158.8bnm³ exported in 2008, due to the financial crisis and a shift by the company’s traditional buyers towards cheaper LNG. The company has made enhancing its LNG capacity and improving its ability to serve the rapidly growing Chinese market, via pipeline projects, a strategic priority.

Colombian coal output in 2010 failed to meet the government’s target of 80Mt, due to heavy rains and their impact on mining operations. The country’s mining regulation Ingeominas reported that coal production last year amounted to 74.35Mt, up 2% from 2009. Total exports weighed in at 68.14Mt. Colombia’s mining minister, Carlos Rodado, has predicted that coal production will rise to 144Mta in 2020.

According to PS Bhattacharyya, chairman of Coal India Ltd, India’s coal production is expected to rise by only 2% this year, compared to its target of 7%, creating a shortfall of 25Mt for the current fiscal year, with an increase in the gap between domestic supply and demand rising to 40-44Mt in the next year. Total output for this financial year is projected to be 439Mt compared to the 431Mt seen for FY2009-10. Ernst & Young have warned that: “Due to soaring inflation, the government is unlikely to increase coal prices, so coal miners may need to bear the brunt of rising mining costs. Fixing prices at artificially low levels may help it combat inflation in the short-term, but is likely to harm the long-term growth prospects of the industry, as it could deter new entrants and incumbents from investing in expansion.”

EUA prices rallied on Friday on the news that the EUA will soon unveil an upwardly-revised emissions reduction target for 2020 of 25% below 1990 levels. This is up from the current 20% goal, but is less than the 30% proposed by some of the major players in the trading bloc. The EU has also said that it may make adjustments to the ETS to offset the impact of increased energy efficiency measures. The news, coupled with a 0.97% increase in the value of the 2012 German baseload power contract, caused the Dec11 EUA contract to rise by 1.36% to settle at €14.89/t. CERs underperformed compared to EUAs and as a result, the Dec11 and Dec12 CER-EUA spreads widened to -€3.51 and -€4.24, respectively.