Commodities Update

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.

About Daniel Lacalle

Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers "Life In The Financial Markets" and "The Energy World Is Flat" as well as "Escape From the Central Bank Trap". Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Hedgeye, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE.

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