Gas, coal, emissions interaction fuels price rallies
The upward trajectory in European gas, coal and emissions prices in recent weeks has been closely intertwined, with coal-to-gas fuel-switching prices moving up and up.
A tight supply-demand balance in Europe's gas and coal markets this summer has driven the two fuels to compete to be lower down in the generation stack. And a sustained rally in European emissions allowances has dragged up fuel-switching prices — the range at which gas-fired plants of various efficiencies would be competitive with coal-fired units.
Strong gas injection demand because of low stocks, the prospect of northeast Asia drawing LNG away from Europe and a heavy Norwegian and UK maintenance schedule because of Covid-19-related postponements last summer has lent support to European prompt and near-curve gas prices (see stocks graph).
The increase in European fuels and emissions allowances has also pulled up Europe's power prices, lifting costs for fossil fuel-fired output amid loosening Covid-19 restrictions. Some major European power markets such as Germany have increased their coal consumption year on year given lower renewables feed-in, higher nuclear unavailability in France and lower-than-average hydropower stocks in central and western Europe, translating into higher spot prices.
The German year-ahead base-load contract has risen by 89.8pc year on year, reaching its highest level in more than 12 years and trading at above €67/MWh on 12 May (see German front-year graph).
The easing of lockdown restrictions as infection rates fall and the vaccine rollout pace could continue to prop up European power prices. The UK is expected to end its restrictions on 21 June. France began to ease its lockdown earlier this month, while several German states are planning to loosen their restrictions in the coming days.
Fuel-switching a moving target
Dutch TTF front-month gas prices have risen faster than API 2 swaps in the first half of May to free up extra supply for injections.
Medium-efficiency 55pc-efficient gas-fired plants would be less profitable to run than 43.2pc-efficient coal-fired units in the power mix based on yesterday's prices, while they would have been ahead in late April (see fuel-switching graph).
But despite a dramatic rise in TTF prices, they have not yet hit levels that would price in the bulk of northwest Europe's coal-fired fleet. Fuel-switching has not provided the flexible demand-side response that it did in summers past — most recently in 2018 when Europe's stocks were even lower than they are now.
This is partly because of Europe's coal phase-out lifting gas' share of thermal generation and reducing the potential to switch between the fuels.
But it has mostly been down to TTF prices being unable to catch up with the rise in fuel-switching prices, because of tightness in the coal market and emissions allowances at record-breaking highs.
The EU emissions trading system (ETS) benchmark December 2021 contract closed at €54.72/t CO2 equivalent (CO2e) yesterday, which was up by €12.28/t CO2e, or almost 30pc, from the start of the quarter (see emissions graph). It added about €14.60/MWh to the fuel-switching price — based on a 55pc-efficient gas-fired plant and a 40pc-efficient coal-fired unit — yesterday, up from about €11.30/MWh at the start of the quarter (see EU ETS graph).
Coal burn struggles to rise high enough
The need for a return to coal burn in Europe has coincided with a tight Atlantic supply situation and strong Asian demand growth, driving up coal prices.
Low port stocks in the ARA region have supported European coal swaps. And Colombian supply is to remain constrained until later this year because of suspended operations by two key mining companies, Prodeco and CNR.
And Europe may have to compete harder for global coal supply this summer and the following winter. China's ban on Australian coal imports because of a diplomatic dispute has driven up Asian prices, while strong power demand has boosted China's coal burn.
Some supply issues have further exacerbated global supply tightness, such as heavy rainfall at times in the first quarter in Australia, Indonesia and South Africa because of the La Nina weather event.
No end in sight for carbon rally
EU ETS prices bucked expectations by continuing their rise in the first two weeks of May, even after the 30 April deadline for emitters to surrender allowances to cover their 2020 emissions passed.
A provisionally agreed new 2030 net greenhouse gas reduction target for the EU of at least 55pc compared with 1990 levels will probably require a tightening of the EU ETS. Proposals to this effect are expected to be presented by the European Commission in mid-July.
The steady upward trajectory of the carbon market — which last recorded a month-on-month loss in October — has also attracted increased speculative investor interest, which has played a part in the continued rise in carbon prices. This interest was probably consolidated by comments made last week by the commission's vice-president, Frans Timmermans, who warned against any intervention in the market in reaction to the rally.
And rising European gas prices themselves have contributed to gains in the EU ETS, as lower prospects for coal-to-gas fuel-switching have spurred compliance demand for allowances to cover the resulting, more carbon-intensive, coal-fired generation.
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Japanese gas utilities to sell more city gas in 2024-25
Japanese gas utilities to sell more city gas in 2024-25
Osaka, 26 April (Argus) — Japanese gas utilities are expecting city gas demand from their customers to rebound in the April 2024-March 2025 fiscal year, after warmer than normal weather reduced the use of the heating fuel in 2023-24. Japan's largest gas retailer by sales Tokyo Gas forecast on 25 April that its city gas sales will increase to 11.422bn m³ for 2024-25, up by 1.1pc from a year earlier. Sales to the household sector are predicted to grow by 3.4pc to 2.8bn m³, after unusually warm weather during the summer and winter of 2023-24. Supplies to the industry and commercial users are also anticipated to edge up by 0.3pc to 8.6bn m³ during the period. The optimistic outlook came after a 10.1pc year-on-year fall in city gas sales for 2023-24. Tokyo Gas sold around 2.7bn m³ of city gas, down by 2.8pc from a year earlier, to the household sector to meet weaker weather-driven demand. Sales to the industry sector plunged by 20.1pc to 4.7bn m³ because of slower operations at their customers, while wholesale sales dropped by 3.2pc to 1.56bn m³. The falls more than offset a 2.3pc rise to 2.3bn m³ in the commercial sector where hotter than normal summer weather boosted city gas demand for cooling purposes. Tokyo Gas forecast temperatures in its service area to average 16.4°C in 2024-25, down from the previous year's 17.5°C. Fellow gas retailer Toho Gas forecast its city gas sales to increase by 1.2pc from the previous year to 3.4bn m³ in 2024-25, with supplies to residential users rising by 5.6pc to 595mn m³ and sales to the industry and commercial sectors edging up by 0.3pc to 2.8bn m³. The company sold 3.37bn m³ of city gas in 2023-24, down by 2.4pc from a year earlier, pressured by the warmer weather. City gas sales by Saibu Gas are expected to rise by 2.3pc from a year earlier to 940mn m³ in 2024-25. The company expanded sales by 3pc to 919mn m³ in 2023-24. Possible increased city gas sales in 2024-25 would increase demand for its main feedstock of LNG. But the 2024-25 sales forecast by Tokyo Gas and Toho Gas would remain lower compared with their 2022-23 sales. Japan's city gas production in 2022-23 totalled 35bn m³, which required 25.5mn t of LNG, according to trade and industry ministry data. By Motoko Hasegawa Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.
LNG Energy eyes sanctions-hit Venezuela oil blocks
LNG Energy eyes sanctions-hit Venezuela oil blocks
Caracas, 25 April (Argus) — A Canadian firm plans to revive two onshore oil blocks in Venezuela, but the conditional deals signed with struggling state-owned PdV come just as the US is reinstating broad sanctions on the South American country. LNG Energy Group's Venezuela unit agreed two deals with PdV to boost output in five fields in the Nipa-Nardo-Niebla and Budare-Elotes blocks, which produce about 3,000 b/d of light- to medium-grade crude, the company said on Wednesday. The Canadian company, which operates in neighboring Colombia, would receive 50-56pc of production of the blocks. Venezuela's oil ministry declined to comment. But finalizing the contracts depends on providing required investment to develop the fields within 120 days of the contract signing on 17 April, LNG Energy said. And the signing came on the same day as the US reimposed oil sanctions on Venezuela and gave most companies until 31 May to wind down business. LNG Energy Group said it intends to comply with existing and upcoming US sanctions, noting that the conditional contracts were executed within the terms of the temporary lifting of sanctions — general license 44 — but it will abide by the new license 44A. The reimposition of US sanctions on Venezuela prohibits new investment in the country's energy sector, at the threat of US criminal and economic penalties. "The company will assess in the coming days the applicability of license 44A to its intended operations in Venezuela and determine the most appropriate course of action," LNG Energy said. "The company intends to operate in full compliance with the applicable sanctions regimes." The two blocks are in the adjacent Anzoategui and Monagas states, part of the Orinoco extra heavy oil belt. Most of Venezuela's output is medium- to heavy-grade crude. Both PdV and Chevron have drilling rigs working in those two states, in separate workover and drilling campaigns. Venezuela is now producing above 800,000 b/d, after the US allowed Chevron to increase production and investment under separate waivers. By Carlos Camacho Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.
MDBs, parties must deliver on finance: Cop 29 president
MDBs, parties must deliver on finance: Cop 29 president
Edinburgh, 25 April (Argus) — Cop 29 president-designate Mukhtar Babayev pointed to insufficient action from multilateral development banks (MDBs) despite encouraging discussions, and urged all countries to play their part to deliver on climate finance negotiations this year. Climate finance discussions will be an important part of climate negotiations this year, having been "one of the most challenging climate diplomacy topics over the years", Babayev said today at the 15th Petersberg climate dialogue in Berlin — a forum for multilateral discussions. The meeting is a key milestone in climate discussions, paving the way for Cop 29 negotiations. The topic will be key as countries must decide on a new global finance goal to replace the $100bn/yr by 2020 pledge to developing countries made in 2009 and missed by developed countries. Babayev said he was working with a range of actors including MDBs, which have a "special role" as "multilateral public finance contributed the single largest part of the [$100bn/yr] target". Babayev said progress from the MDBs was essential, but while he "had many encouraging engagements during the World Bank and IMF spring meetings in Washington last week , we heard a great deal of concern and worry that we did not yet see adequate and sufficient action". "That must change," he said. He also warned that there is no single initiative able to unlock and increase climate finance flows to trillions of dollars, and instead pointed to "many interconnected elements" that countries will need to consider to set this new finance goal — the so-called NCQG. He added that the NCQG working group has already identified many options. "We know that [there are] strong and well-founded views on all sides," he said. "We are listening to all parties to understand their concerns and help them refine official landing zones based on a shared vision of success so we can deliver a fair and ambitious new goal," he added. "We need everyone to play their part so that we can build up unstoppable momentum where everyone is confident that their contribution is fairly matched by the contributions of others". Germany's foreign minister Annalena Baerbock said industrialised countries need to live up to their responsibilities. "Financial contributions from developed countries and multinational development banks will remain the basis of our efforts," she said, confirming that Germany has a €6bn climate goal for 2025. But she also said that "the world has changed" since the UN climate body the UNFCCC established a list of climate finance donors in 1992. The list has just 24 countries, plus the EU, as contributors. "In 1992, the two dozen countries that provided international climate finance made up 80pc of the world's economy. Now, that share is down to 50pc, and the share of all other countries has more than doubled," she said. She urged other countries in the G20, including China, "to join our effort". She pointed out that the donor base was broader for the loss and damage fund — to tackle the unavoidable and irreversible effects of climate change. Cop 28 host the UAE, which is not part of the 1992 list of donors, was the first contributor of the new fund created in Dubai last year. Babayev said that finance will not be the only important topic discussed at Cop 29 and that work must be done to get "the loss and damage fund up and running". Finalising the Article 6 negotiations will also be a key issue. "We cannot leave everything to market mechanisms," he said. By Caroline Varin Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.
US economic growth slows to 1.6pc in 1Q
US economic growth slows to 1.6pc in 1Q
Houston, 25 April (Argus) — The US economy in the first quarter grew at a 1.6pc annual pace, slower than expected, while a key measure of inflation accelerated. Growth in gross domestic product (GDP) slowed from a 3.4pc annual rate in the fourth quarter, the Bureau of Economic Analysis (BEA) reported on Thursday. The first-quarter growth number, the first of three estimates for the period, compares with analyst forecasts of about a 2.5pc gain. Personal consumption slowed to a 2.5pc annual rate in the first quarter from a 3.3pc pace in the fourth quarter, partly reflecting lower spending on motor vehicles and gasoline and other energy goods. Gross private domestic investment rose by 3.2pc, with residential spending up 13.9pc after a 2.8pc expansion in the fourth quarter. Government spending growth slowed to 1.2pc from 4.6pc. Private inventories fell and imports rose, weighing on growth. The core personal consumption expenditures (PCE) price index, which the Federal Reserve closely follows, rose by 3.7pc following 2pc annual growth in the fourth quarter, although consultancy Pantheon Macroeconomics said revisions to the data should pull the index lower in coming months. The Federal Reserve is widely expected to begin cutting its target lending rate in September following sharp increases in 2022 and early 2023 to fight inflation that surged to a high of 9.1pc in June 2022. By Bob Willis Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.
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