Daniel Lacalle

Commodities Update

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US gas ends the year as the king of commodities, up 19% YTD at $4.31/mmbtu as the injection trend reversed to a bullish storage withdrawal in the past two months. Looking to 2014, exports + coal plant retirements adding 3bcf/d of demand keep me confident of improving US gas prices. Total working storage is now at 2,974 Bcf, 562 Bcf below last year’s 3,536 Bcf and 289 Bcf below the 5-year average of 3,263 Bcf.Oil ends the year as the only other commodity up yoy. Brent up 7% ytd at $111.38/bbl and WTI at $99m14/bbl. The differential at $12.25. Demand growth has been better than expected and supply disruptions took 800kbpd of oil in the system. Looking to 2014 I see less supply risks and healthier demand, bringing the call on OPEC down to 29mmbpd. US will be the lion share of non-OPEC supply, keeping a wide WTI discount because of it. 2015 will see US as biggest oil producer above Saudi Arabia.
UK gas at 69p/th ends the year up 6% yoy. The picture of tight supply and inventories plus most LNG absorbed by Japan will likely ease in 2014, to see a more moderate picture of supply-demand helped by cheaper spot LNG as japanese nuclear comes back gradually.
Coal at $82.40/mt ends the year down 13.3% and 2014 sees a similar picture of oversupply and poor demand growth. Demand to increase by 1.5% versus supply at 3.5% is not bullish.
CO2 crashed 30% in 2013 and ends saved partially by EU efforts to contain oversupply. At €4.67/mt, backloading only addressed a small part of the oversupply of EUAs and renewables continue to eat out of thermal generation while industrial production doesn’t pick up in Europe. A flat 2014 is likely.

German power prices at €36.70/mwh down 16% ytd, Nordpool at €32/mwh down 15% ytd… The picture is not bullish for 2014 because of the same reasons as CO2, but power prices seem to have bottomed out and the curve reflects a small inflation into 2015 as EU reduces commitment to Kyoto in favour of growth policies.

2014 doesn’t look like a year of mass commodity inflation, which bodes well for the recovery, and prices remain attractive for consumers and producers. With the oil burden at less than 5-6% of global GDP and gas well supplied and within the trading range, it’s a good environment for everyone without causing a 2008 supply shock that halts the economy.

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