TELF AG on the Current State of European Coal and Natural Gas Markets – July 18, 2023
The European energy market
Over the past week, the European energy market has encountered significant fluctuations, particularly in the coal and natural gas sectors. These fluctuations have been influenced by a variety of factors, including changes in demand patterns, supply risks, and market dynamics. This article examines the recent developments and their potential impact on the European energy landscape.
The European coal market witnessed a substantial loss of approximately $20 per ton in the past week, erasing the gains made over the previous 4-5 weeks. This downturn was reflected in the decline of the API2 and gCNew indices, with a spread of roughly $25 per ton. Consequently, Russian coal is expected to continue flowing toward Asia, while Colombian and South African suppliers are diverting their focus toward India and the Pacific region due to reduced demand in Europe.
The correlation between API2 and TTF, which exhibited strength in June and early July, weakened during the last week. However, it is anticipated to strengthen once again. Notably, Colombia experienced increased coal exports in June. Nevertheless, potential risks persist due to the state of emergency declared in the La Guajira region, which could impact Cerrejon production. Moreover, South Africa’s RBCT exports decreased in June and are expected to continue underperforming due to maintenance and logistical challenges in the rail system. Meanwhile, Indonesia’s coal exports have decelerated compared to previous months but remained relatively stable year-on-year.
In terms of demand, fresh demand in Europe is currently absent, leading to a slight decrease in ARA stocks as consumption remains low. However, several risks, such as a hot summer, hydro shortages, and nuclear fleet outages, could potentially impact pricing. As a result of increased nuclear power production, imports to Japan and South Korea are expected to decline. On the other hand, Chinese coal demand remains strong. Despite this, the combination of increased domestic production and imports has resulted in high stocks. However, recent safety checks implemented due to accidents may begin to hamper production performance during the second half of the year. Indian buyers, adopting a wait-and-see approach, anticipate further price drops, but demand remains latent.
The European natural gas and liquefied natural gas (LNG) market experienced a significant drop in the TTF price. During this period, Norwegian supply increased, and US LNG plants resumed operations. However, European consumption continued to struggle. It is important to note that risks persist as Chinese LNG demand rose by 24% in June, and current netbacks favor Asia over Europe for US exporters. If China and other Asian countries ramp up their imports, it could provide support to the market. As a result, the darks (coal) may remain in the money compared to the sparks (gas) by the fourth quarter, as the market is currently pricing. This suggests an expected increase in coal consumption during Q4 and the emergence of fresh demand. Looking ahead, a scenario involving a cold winter and reduced Russian gas supply could potentially deplete storage reserves significantly by April.
In conclusion, the European energy market, particularly the coal and natural gas sectors, has witnessed notable volatility in recent weeks. Shifts in demand patterns, supply risks, and market dynamics have contributed to these fluctuations. While stability is expected in the immediate future, the market remains vulnerable to potential risks and uncertainties. Market participants must closely monitor gas market dynamics, as they are likely to play a crucial role in shaping the energy landscape in the coming months.
