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Energy Commodity Report: January 27, 2011

All prices unless otherwise stated are for the close of January 26.
2012 baseload German power: €51.43/MWh, up 1.16%
2012 CIF ARA Coal: €115.22/t, up 0.69%
Front month UK natural gas: GBp56.00/therm, up 2.28%
EU emission allowances (EUAs) for December 2011 delivery: €14.91/t, up 0.07%
Certified Emission Reduction(s) (CERs) for December 2011 delivery: €11.30/t, up 0.18%
Brent crude oil futures for front-month 2010 delivery: US$97.65/bbl, down 0.3% as of GMT 08:30, January 27
WTI crude oil futures for front-month 2010 delivery: US$86.66/bbl, down 0.9%, as of GMT 08:30 January 27

Latest buzz
The EIA reported yesterday that US crude inventories rose by 4.8mbbl, while gasoline stockpiles rose by 2.4mbbl, despite demand over the past four weeks rising by 1.1%. In contrast, distillate inventories fell by a modest 100,000bbl. Despite the somewhat bearish news, benchmark crude for March delivery on the NYMEX rose by US$1.14, to settle at US$87.33/bbl on Wednesday. Traders chose to follow in the wake of global stock markets, which rallied in response to President Obama’s State of the Union address, with plans to lower business tax rates and close corporate tax loopholes being particularly well received. Additional support came from US Commerce Department statistics indicating that sales of new single-family homes rose by 16% in December to the highest rate seen since spring 2009, while total new home sales rose by 17.5% in December to 329,000, an eight-month high. Another bullish signal was the Federal Open Market Committee’s decision to leave its benchmark interest rate unchanged, at a range of 0% to 0.3%. In the short-term, oil’s potential gains are being restricted by fears that the Chinese government may adopt more anti-inflationary measures prior to the lunar new year holidays.

Natural gas for February delivery settled up US¢1.8, or 0.4% higher at US$4.491/mBtu on the NYMEX, before its expiry on Thursday. Gas for March delivery closed up 0.2%, at US$4.501/mBtu. Support has come from near-term weather forecasts for cold weather across much of the eastern US and traders are also expecting the EIA to report a larger than average draw-down in gas inventories due to higher-than-normal heating demand. A Dow Jones poll has predicted a 171bnft3 withdrawal from storage, 1.3% above the five-year average. One issue that may cause prices to weaken is that the yield from buying gas for April delivery and selling November futures was US¢35.7/mBtu, compared to the US¢72/mBtu seen a year ago. This reduces the incentive for the construction of new storage facilities and increases the risk of a potential glut during summer months. According to Bentek Energy LLC, around 42bnft3 of new storage capacity is under construction this year, compared to the 99.7bnft3 and 124bnft3 built in 2010 and 2009, respectively. To put this into perspective, David Pursell, managing director at Tudor Pickering Holt & Co, believes that as much as 200bnft3 of new storage will be needed by autumn. Around 58.7bnft3 of gas storage and pipeline projects have been canceled due to the flat gas curve and weak demand growth.

Wednesday saw little change in prompt coal prices, despite some traders’ belief that the recent losses (some US$15/t) may not be fully warranted. Some support has come from the rise in oil prices, while an emphasis in spread trading has made intraday volatility in absolute prices less of an issue for traders. The price floor created by recent supply disruptions has been given fresh strength, thanks to the news that changes to Indonesia’s mining laws are delaying coal shipments, which could prove particularly painful for Indian buyers which have opted for Indonesian coal after Richards Bay prices climbed above US$125/t FOB. Over in Europe, German utility demand has evaporated, courtesy of a capsized sulphuric acid tanker on the river Rhine, which has blocked the shipping of coal to power plants by barge from the ports at Amsterdam and Rotterdam.

Over in China, benchmark coal prices rose by a single yuan over the January 19 to 25 period, to average CNY774/t, despite sea ice at Bohai Bay. In the week of January 17-23 daily coal inventories at the port of Qinhuangdao stood at 7.061Mt, up 1.53% on the previous week, while stockpiles at the ports of Jing tang and Caofeidian have also increased. A factor that may serve to boost prices in the short term is the Lunar Festival which begins on February 3, as the strain it places on the country’s rail network may squeeze coal deliveries to power plants.

Both EUAs and CERs advanced slightly on Wednesday, with the Dec11 EUA contract unable to breach resistance at €15.00/t. The Dec11 and Dec12 CER-EUA spreads finished the day at -€3.61 and -€4.29. Support came from a uniformly-positive energy complex, coupled with natural gas prices rising faster than those of coal. The spot market remains closed and the EU has said that it will provide 24 hours notice before any reopening. The Hungarian government has announced plans to sell 20-40m AAUs in 2011.

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