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Energy commodity report: January 13, 2011

All prices unless otherwise stated are for the close of January 12.

2012 baseload German power: €53.85/MWh, down 0.26%
2012 CIF ARA Coal: €119.99/t, down 0.57%
Front month UK natural gas: GBp56.80/therm, up 1.72%
EU emission allowances (EUAs) for December 2011 delivery: €14.25/t, down 0.42%
Certified Emission Reduction(s) (CERs) for December 2011 delivery: €10.93/t, down 0.09%
Brent crude oil futures for front-month 2010 delivery: US$98.45/bbl, up 0.3% as of GMT 8:45, January 13
WTI crude oil futures for front-month 2010 delivery: US$91.81/bbl, up 0.1%, as of GMT 8:45 January 13

Latest buzz

Yesterday saw benchmark crude for February delivery rise by US¢74 to close at US$91.86/bbl, the highest settlement price seen since October 2008. The EIA’s “This Week in Petroleum report”, which included the news that US crude inventories fell for the sixth straight week, dropping by 2.2Mbbl to 333.1Mbbl last week, compared to analysts’ expectations of a 300,000bbl decline, as reported by a Platts Survey. However, gasoline and distillate inventories rose by 5.1Mbbl and 2.7Mbbl, respectively.  The continuing uncertainty over the restart of the Trans-Alaska pipeline also provided positive momentum. In early Asian trading today, crude was temporarily pulled down slightly due to a stronger US dollar. While Portugal’s bond auction yesterday was a qualified success, traders will be taking some direction from Spanish and Italian debt auctions later today, together with the outcome from the European Central Bank policy meeting.

The number of oil contracts held by financial traders rose by 4.6% in the week to December 28, taking the total to the highest level seen since June 2006, according to the US Commodity and Futures Trading Commission (CFTC). The increase is thought to be due to growing speculation that oil will breach US$100/bbl in the near future.

Meanwhile, in a move that has prompted some scepticism from industry experts, Venezuelan president Hugo Chavez announced on Tuesday that the exploration of deposits of heavy crude boosted the country’s proven oil reserves to 253bnbbl, compared to the 172bnbbl reported last May and the 260bnbbl claimed by Saudi Arabia.

President Chavez said a televised speech that it is “scientifically proven we’re now in the first place in the world in oil reserves.” Unfortunately, there remain serious questions as to where the investment needed to exploit such reserves will come from, given the increasing role of the state oil company, PDVSA, in funding for Mr Chavez socialist reforms and a hostile attitude towards independent oil companies, as demonstrated by the seizure of assets from some 60 oil service companies back in mid-2009 in response to their threat to cease operation until PDVSA settled its debts.

Natural gas for February delivery rose by US¢5, or 1.1%, to settle at US$4.531/MBtu on the NYMEX, as forecasts continue to predict cold weather for most of the eastern US, toward the end of this month. Analysts are currently expecting the EIA to report a 142bnft3 withdrawal from storage for the week ended January 7, according to a Dow Jones Poll, compared to the five-year average of 108bnft3. As of December 31, US natural gas inventories stood at 3.097tnft3, 6.5% above the moving five-year average, but down 10% from November. In its latest Short-Term Energy Outlook, the EIA predicts that marketed gas production will average 61.38bnft3pd in 2011, down 1% from its previous estimate in December, as low prices work to discourage drilling activity. Industrial demand is expected to rise by 1.1% to 18.15bnft3pd.

Prompt physical coal prices for delivery into Europe saw little movement on Wednesday, retaining gains of around US$10/t made earlier in the week. Flooding in Queensland is expected to peak tomorrow. Some are speculating that US coal may be able to make up for the shortfall in Australian production, but there are significant logistical constraints that will prevent US coal producers from gaining the most from this opportunity. A February-loading South African cargo traded at US$129.00/t, while a February delivery DES ARA cargo traded at US$132/t.

In the UK, next-day power prices traded at a discount of GBP0.60 to electricity for delivery in the six months from April. So far this winter, the day-ahead contract has been at a premium to the summer contract. According to Craig Lowrey, a consultant at The Utilities Exchange Ltd, this may be due to the fact that coal has become more expensive for power utilities to burn than natural gas (due in part to the flooding in Queensland, Australia), driving up the summer contract. UK Natural gas prices rose yesterday, due to a halt to imports from Belgium through Interconnector (U.K.) Ltd’s pipeline, which had previously been importing gas at a rate of 15Mm3pd. Front-month natural gas rose by 1.72% to settle at GBp56.80/therm. The National Grid predicted that gas demand will be about average for this time of year at 369Mm3 in the 24 hours through 6am.

EUAs lost ground yesterday, as support from the energy complex evaporated and the market factored in the prospect of increased supply from government auctions. The German government’s auction of 570,000 EUA futures cleared at €14.18/t on Wednesday morning, while a UK government auction of 4.4M EUAs is set to take place today. CER prices saw little movement, with CERs for December 11 maturation sliding down just 0.09%. The Dec11 CER-EUA spread narrowed by €0.05 to -€3.32, while the Dec12 spread shrunk by €0.07 to -€3.81.

Over in the US, it appears that regional climate cap-and-trade initiatives are struggling, thanks in part to the slow pace of the economic recovery and the lack of progress at a federal level. It is now increasingly likely that the Western Climate Initiative (WCI) will lose New Mexico, leaving California as the only actively-participating US state within the scheme. Kevin Kennedy, assistant executive director of the Office of Climate Change at the California Air Resources Board, told lawyers at a forum that the election results in New Mexico mean that the state will probably not participate in the WCI. “The change in administration probably takes New Mexico out of the situation,” Kennedy said.

His words are given more weight by the decision made by New Mexico’s new governor, Susana Martinez, to remove all members of the state’s Environmental Improvement Board, due to “anti-business” policies. The board approved measures for the limiting of CO2 emissions and passed a motion to join the WCI in 2010. Arizona’s Governor Jan Brewer issued an executive order dropping out of the WCI back in February 2010.

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