It was a strong week in the oil market as Brent pushed through the $115/bbl to reach the highest level since April last year. Positive macro-economic data, coupled with the increased geopolitical risk premium provided a positive backdrop for the strong gains. In terms of fundamentals, OPEC production continued to slide in January, reportedly reaching the lowest level in 15 months. It is important to note that OPEC production is nearing the official production quota of 30mbpd level where it may stabilise. Similar to reports in December, reduction in production is largely attributed to a well-supplied market.
Coal ended the week flat as the on-going fears about supply disruptions failed to offer any support to prices. Demand remains weak, while current supply disruptions are not bigger enough to materially impact the market balance. Currently, Colombian volumes are impacted to a tune of c.3mmt/yr due to a combination of weather and mines issues while heavy rains in Indonesia and Australia are having similar impact as well. However, Chinese producers continue to competitively price the domestic production while inventories at power plants are still at healthy levels (c.21 days of consumption).
UK natural gas prices were down 1.0%, as the system remained well supplied. It is the traditional time of the year to start hearing about contract renegotiations with E.On being the latest one commenting this week that it believes it will negotiate away its “risks” in the long-term gas contracts over the next 12 months. CEO Johannes Teyssen outlined how the company’s previous gas contract renegotiations had led to a 50% reduction in the risk faced by its contract portfolios. The remaining 50% was going to be taken away through renegotiations on the remainder of the contract portfolio this year. While it is difficult to know exactly what is meant by the reduction in risk, the risk referred to is likely the basis risk of buying gas at oil index and selling it at hub. This is one of the clearest statements that the settlement with Gazprom last year represented a fundamental reduction in the prevalence of oil indexation in those contracts.
US natural gas prices remained week, losing 1.7% this week. Prices sold-off on the back of a smaller-than-expected draws from inventory (-194bcf vs. -204bcf expected). On the other hand, residential and commercial demand were robust as temperatures were 12% colder than this time last year, but…
Daniel Lacalle's views expressed in this blog are personal and should not be taken as buy or sell recommendations.