Search for the price bottom continues…

For most of February, sentiment on European energy markets remained on the bearish side. Extremely mild weather conditions in large parts of the continent had a particularly strong bearish influence, with consumption of electricity, heat and natural gas unseasonably low. As a consequence, coal burn rates and CO2 emissions also declined, putting prices under downward pressure in all these markets. 

Gas storage withdrawals in Europe were also very low for the same reasons, with gas inventories ending the month at record high levels for the time of year. All in all, there is little if any concern that enough storage will be built up through 2024 to meet next winter’s demand. In fact, gas prices were falling to incentivise demand growth outside Europe, with LNG supply diverted to prevent early filling of European storage tanks. In Europe, gas prices had already dropped so low in the hunt for demand that nearly all coal plants were pushed out of the merit order. That led to a massive drop in coal consumption and a simultaneously significant decline of carbon emissions in the system.

However, by the end of the month prices suddenly started turning in a bullish direction again. What happened? 

Firstly, the US sanctioned SUEK, one of Russia’s largest coal exporters. Although we don’t believe that makes a difference for China, India or Turkey – Russia’s key coal customers nowadays – it could accelerate South Korea’s retreat from buying Russian coal. If the country instead turns to Colombian or South African coal, oversupply in the Atlantic market could potentially be reduced, especially if this coincided with China also buying more Colombian coal, as announced earlier this year. 

Secondly, both gas and carbon prices suffered in recent months, not only from bearish fundamentals but also from speculative money riding that wave. It may have required only that little spark of bullish tone from coal to trigger a first wave of profit taking – although the fundamental link to gas and carbon is rather weak now, with gas already clearly ahead of coal in power generation. 

Right now, it’s hard to tell if the change of sentiment is sustainable and hence signals a lasting recovery of energy market prices. Looking at fundamentals, we believe a lot still depends on further developments in demand and supply conditions on the gas market. Will gas rebalance by attracting more demand from Asia, effectively reducing LNG supply in Europe? Or will additional demand need to be activated in Europe by replacing lignite power plants in the merit order? Since the answers to these questions have ramifications for carbon emissions and the power sector’s marginal suppliers, we’re hesitant to call the bear cycle over just yet.