In this week's Market Movers: carbon traders eye the German government's plans to cancel allowances from its coal phase-out; the spotlight will be on a new government in Russia; and will the container shipping market enjoy a happy Chinese New Year?
In this week's Market Movers: carbon traders eye the German government's plans to cancel allowances from its coal phase-out; the spotlight will be on a new government in Russia; and will the container shipping market enjoy a happy Chinese New Year?
All eyes will be on Switzerland this week, as the World Economic Forum holds its annual meeting in Davos of 3,000 of the world's most influential politicians, economists, business leaders, and activists. Key speakers this year include US President Donald Trump, Saudi Aramco chief executive Amin Nasser, and the environmental activist Greta Thunberg. Topics under discussion include "society and the future of work", climate change and "how to save the planet", as well as "better business", "tech for good" and "fairer economies."
Among the speakers at Davos is German Chancellor Angela Merkel, as carbon traders look for clarity on her government's plans to cancel carbon allowances from its coal phase-out. A landmark agreement last week detailed closure dates for lignite units that accounted for 50% of German power sector emissions in 2019. There was little doubt the certificates would be cancelled, but questions remain about the dates of cancellation. Also, with a Brexit date now in clear focus, details about 2019 and 2020 allocations remain outstanding, which could be a bearish factor for prices as details emerge on the timing of the additional volume to be brought to market.
Whether or not he appears at Davos, the spotlight is also likely to fall on another leader, Russia's new prime minister, Mikhail Mishustin. Since he replaced Dmitry Medvedev last week, the markets will be looking for changes in Russian energy policy and the country's relationship with OPEC. Russia has been keen on the new diplomatic ties it has forged with Middle Eastern producers such as Saudi Arabia since their landmark production cut agreement in 2016. But on the actual production cuts themselves, Russia has been lukewarm. Decisions will have to be made fairly soon as the OPEC-plus group of ministers meets in less than 7 weeks in Vienna.
The climate change being discussed by the great and the good at Davos has caused a lack of winter ice at key ports in the Baltic Sea. This may push down clean tanker freight rates this week as shipowners idle ice-class ships stationed in the North Sea. This is expected to build up the availability of ships for larger vessel classes, which now face closed arbitrage opportunities for transatlantic and eastbound shipments.
In the dirty tankers market, it's a different story: participants will be looking closely at the Persian Gulf, as Iraq's Basrah crude loading programs are expected to be released before Friday. Any increase in volumes in the region is expected to spur freight even higher, after rates corrected on a return to relative stability in the region in the aftermath of the killing by the US of Iranian general Qassem Soleimani.
The relatively warm European winter will also be on the gas market's radar this week. Gas prices in Europe are low partly due to the lack of heating demand but mainly because of sky-high inventories.
As you can see from the chart on your screen, gas stocks across the EU are currently around 77 billion cubic meters, around 18 billion more than a year earlier. To put that surplus into context, the additional stocks represent only a little less than the total pipeline exports from key supplier Algeria to Europe in 2019. Withdrawals across the EU have stepped up since the start of 2020 to some 450 million cubic meters a day as Russian deliveries slumped. Storage across Europe was built up to record highs by the end of 2019 on fears that Russian gas transit via Ukraine to Europe could be disrupted.
Moscow and Kiev did reach a last-minute deal on transit, but Russian gas flows are still much lower than in 2019. Russian gas company Gazprom itself built up more than 11 billion cubic meters of stocks in Europe and may be withdrawing that gas rather than flowing via Ukraine to avoid keeping gas in storage any longer than necessary to mitigate the cost.
Finally, with Chinese New Year approaching at the end of the week, the outlook appears bearish for the container freight market, especially for the trade lanes from North Asia into Europe. The shutters coming down across North Asia could pose significant problems with supply chains into Europe – as short-term demand has grown significantly, resulting in a significant number of containers being left in ports in North Asia.
Despite rates being supported as the holiday approaches, they are expected to tumble as demand dries up for several weeks. As you can see from the chart on your screen, last year, it took until mid-March for demand to pick up again. However, with Chinese New Year earlier this year, demand is expected by most market participants to recover by the end of February.
Thanks for kicking off your Monday with us, and have a great week ahead.