Bull run not over for wider energy complex – traders

By Sabrin Jama

LONDON (ICIS)–European natural gas and power prices are likely to rise further this summer, with commodity markets struggling to balance supply with demand in the wake of the coronavirus pandemic.

With cases falling, lockdowns lifting and economies recovering, industrial and commercial activity is rising globally and in Europe. But with energy infrastructure maintenance and new project installations delayed last year due to the pandemic, the supply side is struggling to ramp up to compensate.

ICIS polled traders across a range of different energy commodities and hubs to get the market’s take on the exceptional bull run unfolding across the wider energy complex this summer.

GAS AND POWER

One German power trader said that he expects a period of consolidation before prices start to increase once more.

“I don’t see how the gas market can relax before we are deep into the third quarter,” he said. European gas stocks are close to record seasonal lows following an extended winter and competition with Asia for LNG supply.

Asian spot LNG prices are expected to increase as buyers anticipate that a warm summer will increase demand from cooling appliances.

Increasing Asian demand would continue to negatively affect European gas injections this summer. These must pick up speed to fill sites before the winter, but strong gas demand in eastern Asia will divert LNG cargoes away from Europe.

Russia has been reluctant or unable to transport the additional gas Europe requires through Ukraine, but will eventually increase flows, either through this route or through the long-awaited Nord Stream 2 pipeline , which could provide a bearish trigger.

“Emissions will most likely stay bid due to general bullish sentiment and the high gas prices,” the same source added, referring to traders attempting to buy carbon outnumbering those selling it.

A drive from the EU and national governments to decarbonise by 2030 has been underpinning strength in the carbon market.

Another trader commented that Italian power prices “are so high that my gut feeling tells me they can’t rise even more,” but with carbon expected to increase, power prices will inevitably have to rise as well, he said.

As polluting gas and coal still provide a big chunk of Europe’s power generation, carbon permit prices affect the production costs of these generators.

OIL

Strong adherence from the OPEC+ countries to limit production has contributed to the tightening of the global supply and demand relationship. If OPEC+ don’t move to unwind supply cuts ahead of schedule, prices are expected to continue rising.

With the easing of various lockdown measures across the world’s major consumers, crude is likely to remain bullish throughout this summer.

A major driver behind this positive sentiment is the success of vaccination programmes, unlocking oil demand in leading economies. Almost half of the UK and US populations have received both doses of the vaccine, with major European economies such as France, Germany, Italy and Spain nearing one-third.

In addition, oil demand could increase further due to the summer driving season, which will be amplified by the restrictions against travelling abroad. As a result, robust demand for gasoline and diesel will support overall oil consumption this summer.

This sustained bullishness hinges on the possibility of a new deal between the US and Iran.

Returning to the deal and eliminating US sanctions would have a significant impact on the oil market, as an additional 1.5m bbl/day of supply would gradually make its way to the market.

If this deal goes through, it could weigh on prices – although current undersupply should allow the market to absorb additional barrels.