Daniel Lacalle

Commodities Weekly

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It was an uneventful week in crude markets. Continued delays in North Sea shipments continue to support Brent. However, OPEC production continued to slide in December, reaching a 0-month low. Cut in Saudi production is the main reason for the decline and was originally started to offset the gains in Libyan and Iraqi production. The decline is also in line with comments from Saudi oil minister and OPEC secretary general that the oil market remains well supplied.

The 6.8% gain in coal prices is explained by the contract rolling from 2012 to 2013. Otherwise, fundamentals remain weak as Chinese buyers are not expected to return to the market until after the Lunar Year celebrations in February. Until then, prices are expected to remain range-bound.

UK natural gas prices gained 4.5% this week. While demand has stayed largely flat since the last week of December, supply levels remain volatile due to inflows from Norway. Thus, volatility in supply is expected to support prices going forward.

US natural gas prices were down 5.3% this week, selling off on further negative demand revisions on the back of warmer weather forecasts. January accounts for c.25% of heating degree days so temperatures in January will be important for further direction in nat gas prices. Thus, we maintain the view that the magnitude of nuclear outages remains the biggest swing factor in the supply/demand equation.

CO2 was down 10.1% this week as further supply increases from weekly auctions continue to weigh down on prices. EU lawmakers are yet to decide on the possibility of temporarily curbing supply of permits. Until then, increases in supply will keep prices under pressure.

German power prices were down 2.1% but began to recover from the historic lows in the second half of the week. Prices were down 9.5% on December 27th due to increased supply from renewables on Christmas Day. Thus, December 25 saw an average of €-15MW/h prices which is the first totally negative day in 5 years. Wind generation was c.3x yearly daily average as wet and windy conditions prevailed.

Baltic Dry Index ended the week flat as activity remains low amid holiday season. Interesting piece of news was John Fredriksen’s decision to order up to 14 new built Capesize vessels (8 firm and 6 options).

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