Global market moves feed energy downside jitters

Author: Chetan Patel

2020/03/16

LONDON (ICIS)--Heightened concerns surrounding the economic fall-out from the coronavirus is set to further weigh on European energy markets, traders say.

Central banks are working to contain the prospect of a prolonged economic downturn as the coronavirus sends more countries into lockdown.

The US Federal Reserve was the latest in line to take preventive measures, slashing interest rates to zero on Sunday. Sweeping central bank intervention, however, has done little to ally investor concerns with global indices tumbling on the market open on Monday.

According to data from the London stock exchange, the FTSE 100 fell to its lowest level in almost a decade, while selling on the US market triggered another circuit breaker, pausing trading for 15 minutes. Oil prices also plunged more than 10% on 16 March, with the Brent front-month falling below $30/barrel for the first time since 2015, before rising back above that level.

While the correlation between oil and gas and power prices has faltered in recent years, the link between broader macro-economic weakness and demand projections is expected to drive downside.

European benchmark gas and power prices responded by continuing their slide. Compared to Friday’s market close, as of 11:00 London time:

- TTF front-month was down 3.8%

- NBP front-month dropped 1.8%

- German power front-year by 3.2%

FALTERING DEMAND

Most major economies such as the UK and China have already revised their growth forecasts for the first half of 2020. Contraction is likely to continue into the second half of the year according to one trader, hitting energy demand across sectors.

“When banks, financials and consumer spending stocks are being sold-off alongside gold, utilities and staple retails (food groceries etc). It really goes to show that this falling knife still has more ground to go,” the trader said.

Another trader expected the global sell-off to continue with net-long positions from most investors still at record highs. He added that as more places are locked-down, the “increasing prospect of bankruptcies across the business landscape” will drive a new wave of selling.

Tej Parikh, chief economist at the Institute of Directors said while, “the response by global central banks and governments will give some confidence to businesses and financial markets, there is little policymakers can do to directly to encourage spending as cases rise and more people go into isolation, which shifts the emphasis on helping firms to bridge a challenging period for cashflow”.

The weaker business landscape is expected to eat further into energy demand, while the prospect of industrial output disruptions also remains.

Kyle Martin, head of market insight at LCP said: “We are expecting overall electricity demand [in the UK] to reduce due to school/office closures, industrial shutdowns and fewer journeys being made. With more people working from home, we expect the evening peak to be slightly flatter and earlier.”

The current sell-off in European carbon prices may also suggest that the market is already factoring in a prolonged period of subdued industrial output. Data from ICE showed that the benchmark EUA product was trading below €20/tCO2e for the first time in over a year.