Daniel Lacalle

Commodities Update

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Oil still trending down ($106.8.0 Brent), WTI discount to Brent now at $12/bbl.I have been talking all month about the widening driven by tightness in Brent and ample supplies in US. Brent has stayed strong this week on the drying up of Libyan exports. No such supply issues in the US where crude stocks have risen well above the 5-yr range causing the Brent-WTI spread to widen abruptly.

EIA this week: Crude stocks +4.09 mboe vs. +2 mboe expected. Gasoline stocks -1.71 mboe vs. +0.03 mboe expected. Demand 20.14 Mboepd, year-on-year +9.9% . US Crude oil production up +1,184 kboepd year-on-year. Peak what?.

Coal slump continues, now at $82.00/mt, losing all its October gains as ample increase of exports from Australia and South Africa meet high inventory levels all over Europe and milder weather. We would not see switch from gas to coal at a meaningful level until coal reaches $81/mt according to Morgan Stanley.

US gas continues to slide at $3.64/mmbtu. Weekly storage rose 38bcf, well below the 5-yr average of a 57bcf injection. Inventories are now 3,779 Bcf, narrowing the surplus versus the 5-yr average to 57bcf. Last week’s weather was 34% cooler than the 5-year average. Over the last month, the weather-adjusted Supply/Demand balance has been 0.4bcf/d oversupplied versus the 5-yr average.

A drop below $3.50/mmbtu would prompt increased consumption in the power generation sector. Gas-fired generation becomes increasingly competitive with coal-fired power plants as gas prices drop, and as much as 1.5-2 Bcf/d of natural gas consumption can be lost and gained in the power generation sector as prices swing in the $3.25 to $4.25 /mmbtu range (according to UBS).

UK gas is the only rock star commodity… Back at 69.70p/therm, above the resistance level of 69.50/th seen all month. Daily demand increased to 193 mcm from average month daily demand figure of 175 mcm. Despite acceptable storage levels, 4,600 mcm, prices have shot with demand increase.

CO2 continues to collapse at €4.63/mt despite on-going talks and meetings expected in November at EU level to discuss strict measures to curb EUA oversupply. The debate in Brussels has already moved on from backloading to structural reform proposals, which could eventually lead to tightened system. Commission officials are increasingly sold on the idea of a flexible reserve mechanism, aimed at making the ETS a more responsive system so that a large over or under supply could not build up in future. Officials seem convinced that such reform should take effect in Phase III (2013-2020) though nothing will likely be agreed before 2015 and how this could work in practice is unclear. Don’t bet on the EU to make a big change, and CO2 price reflects it.

Power prices in Germany fall (again) to 37.35/MWh and Nordpool to €38/MWh. No real bullish argument either from weather or industrial demand anywhere in Europe except the UK where reserve margins remain tight (clean dark spreads at £26.5/MWh vs £24/MWh in September).

In Southern Europe, demand continues to be weak. Power demand in Spain in October was down another 1.2% weather adjusted, with gas demand down 10.6%.

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