NATGAS
The Dec24 EU ETS and TTF front month power contracts have diverged in recent days with carbon allowances on track for a sharp weekly decline, while TTF gas is on track to rise on the week. Rising tensions in the Middle East have supported natural gas prices, while emissions have shrugged off gas gains to be weighed down by bearish fundamentals with higher renewables, weak economic sentiment and lower German gas-fired output.
- TTF is set to close the week higher by 4.54%, driven by Iranian attacks on Israel and the potential fears that retaliation on Iranian oil sites was mentioned by President Biden on 3 Oct.
- Escalation in the region is highlighting fears for European gas markets surrounding potential retaliatory disruptions to Israeli offshore production, or Israel shutting down its gas fields, which could prompt Egypt to seek even more LNG, causing tightness in the market.
- The European market has also been touchy on supply disruptions ahead of winter. However, improved pipeline flows and greater LNG output are helping to meet the increased demand brought on by colder weather.
- In contrast, EU ETS Dec24 is tracking a weekly net decline of 6.85%
- Carbon allowances are weighed on by firm renewable generation on the week, with German wind averaging about 18.4GW over 30 Sept-4 Oct compared to around 19GW average over 23-27 Sept. This is higher than the week prior (over 16-20 Sept).
- As a result, German gas-fired output has been lower – averaging 3.3GW over 30 Sept-4 Oct from 3.5GW the week prior.
- Lower EU ETS CAP 3 auction clearings have also weighed, with the latest auction ending lower at €62.02/t CO2e on 3 Oct, compared with €63.19/t CO2e in the previous auction and the lowest for any EU EUA auction since 9 April.
- Weak economic sentiment from Germany also weighed on allowances after sources said on Monday Germany’s government is expected to cut its growth forecast for 2024 to at best stagnation – from 0.3% growth previously projected - according to Bloomberg. This could have been expected, especially after last week’s soft PMI data.
- A decline in EU equities offered additional downside. Eurostoxx 50's are now around 75 points off all-time highs - largely profit-taking off the China-inspired rally and partially in response to Powell's moderate hawkishness earlier this week. This has weighed on US equities along with geopolitical risk, dragging Europe with it, and weighing on allowances.
Looking ahead, wind forecasts in Germany and France indicate strong wind going into next week – which may continue to pressure emissions costs amid a potential impact on thermal generation.
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