Commodities: crude, gas, coal up as Libyan chaos starts to impact on oil production

All prices unless otherwise stated are for the close of February 21.

2012 baseload German power: €53.34/MWh, up 1.91%
2012 CIF ARA Coal: €121.36/t, up 1.70%Front-month UK natural gas: GBp53.75/therm, up 2.87%
EU emission allowances (EUAs) for December 2011 delivery: €15.26/t, up 1.80%
Certified Emission Reduction(s) (CERs) for December 2011 delivery: €11.70/t, up 1.74%
Brent crude oil futures for front-month 2010 delivery: US$107.43/bbl, up 1.6%, as of 09:30 GMT, February 22
WTI crude oil futures for front-month 2010 delivery: US$97.64/bbl, up 2.4%, as of 09:30 GMT, February 22

Latest buzz

Oil prices have spiked again in response to the increasing volatile situation in Libya. The fact that the violence has prompted international oil companies to evacuate their staff and has forced one company to shut in 100,000bpd of output, equivalent to around 6% of Libya’s oil production appears to have really rattled the markets. The leader of the Al-Zuwayya tribe in the east of the country has threatened to cut off exports unless authorities cease the violence against protesters. Libya typically exports around 1.4mbpd of oil a day, with Germany, Italy and Spain being its biggest customers. Total global spare capacity is estimated at around 4.5mbpd, but it is unclear as to how much of this is in the form of heavy sour crude, in contrast to the high-quality oil produced by Libya.

In addition, tensions in the Middle East have been raised higher by the fact that two Iranian warships have entered the Suez Canal as part of their journey to the Mediterranean for training exercises. The news has attracted the ire of Israel, which sees the exercise as a provocation.

The IEA’s chief economist, Fatih Birol has said that “Oil prices are a serious risk for the global economic recovery,” and added that IEA member states would consider releasing oil from their emergency reserves should supplies be disrupted as a result of the situation in the Middle East. Meanwhile, Saudi Arabia’s deputy oil minister, Prince Abdulaziz bin Salman Al-Saud said that the market is currently abundantly supplied and therefore does not warrant intervention from other OPEC members.

The situation has had a knock-on effect on other energy commodities, with UK Natural gas for winter delivery rising 2.6% to GB62.15p/therm at 4:30pm on Monday, the highest price seen since December 30 and equivalent to US$10.09/mBtu. Gas for immediate delivery rose by 1.8% to GB53.7p/therm, which in turn helped to push up UK baseload power for next working day delivery by GBP1.15, to GBP46.75/MWh.

Gazprom has rejected a request from Germany’s E.ON Ruhrgas AG that Russian gas purchases be linked to the spot price. The current position in which long-term gas contracts between Gazprom and European customers are linked to the price of oil has come under strain of late, given the rising price of oil and the current abundance of natural gas on the international markets. In related news, Gazprom has said that it will pay Ukraine US$2.75bn in transit fees for shipping natural gas to Europe via its territory, up from the US$2.6bn paid in 2010. Anatoly Podmyshalsky also said that this year Ukraine will pay an average price of US$280/1000m³ of natural gas, rising to US$300/1000m³ in 2012. Russia is expecting to supply Ukraine with 40bnm³ of gas in 2011, up from the 38.7bnm³ delivered in 2010.

Persistent sea ice is still having an impact on Russian coal deliveries, with buyers in northern Europe being particularly affected, although the actual extent of the problem is currently unclear, particularly given subdued physical trading in Europe.

Chinese coal prices have fallen to a near four-month low of CNY770/t (US$117.1/t), due to a seasonal lull in demand, with many domestic buyers expecting the situation to persist until at least the end of March. The drop in prices occurred despite heavy fog in the Bohai Sea, which impacted on shipments for several days at the Qinghuangao and Tangshan ports, highlighting the raised levels of coal inventories at most power plants in the country, which are currently hovering around 20 days of coal burn. The situation has widened the gap between domestic and international coal prices and is expected to act as a break on imports. So far this week, prompt physical prices for South African cargoes have risen to US$119.25/t, while Newcastle thermal coal has risen by almost 8% to US$136.50/t. The increases are in response to the situation in Libya, given the lack of buying interest in Europe and Asia.

The Dec11 EUA contract rallied strongly on Monday, rising above €15.00/t in the first hour of trading. The events unfolding in Libya appear to have refocussed traders’ minds on the energy complex and this, combined with higher fuel prices and a corresponding increase in the value of the 2012 German baseload power contract provided the necessary impetus, to push Dec11 EUAs to a two-month high, finishing at €15.26/t.

CERs also performed strongly but were unable to keep up with the pace of EUAs. As a result, the Dec11 and Dec12 CER-EUA spreads widened to -€3.56 and -€4.30, respectively. Last week, just over 550,000 CERs were issued to two industrial gas destruction projects, a situation that should have added further support to CER prices.