Fuel for Thought – Nov 25th

25 Nov, 2011

What next for Europe? The European debt crisis has deteriorated to the point that it appears that ECB debt monetisation is the only policy weapon that remains to prevent a disorderly Eurozone breakup.  But it may take a much larger selloff in financial markets to scare the ECB into deploying this weapon, given that monetisation is not in the ECB’s DNA let alone their vocabulary.  Even if this is the case, ECB intervention may be aimed at containing damage as opposed to an unlimited backing for struggling sovereigns.  The impact on European energy markets of the debt crisis and associated slowdown in global growth looks set to continue well into 2012.

North Sea gas deal: Centrica has signed a $20bn gas supply deal with Statoil this week as well as purchasing $1.65bn of Norwegian upstream assets.  The deal is fully indexed to NBP which is indicative of how the evolution of gas hub liquidity is driving the transition away from oil-indexed contract pricing.  It is also a clear indication of Centrica’s strategy to expand its upstream presence backed by a belief in the key role that gas will play into next decade.

Carbon prices plunge again: Increased expectations of emissions reductions from a slowdown in European growth have seen the carbon market selloff below €8/t this week, amid new calls for permits to be cancelled and EU reduction targets to be increased.  Meaningful fundamental analysis is difficult in a market that is driven by regulatory risk and compliance flow.  However it is clear that despite bankability of credits into the next phase of the ETS, the carbon price signal in Europe is approaching a level where it will have little meaningful impact on investment and operational decisions.  

Mild European winter? Long range weather forecasting is a punishing profession, but the experts are calling for the mildest winter since 2007-08. A mild winter would compound the downside pressure on gas and power prices from what appears to be an accelerating slowdown in European growth.  The impact on market prices may be magnified by the contract position of suppliers, given the enthusiastic winter hedging that took place earlier this year as the result of the post-Fukushima LNG led tightening in the gas market.

Picture of the week:

The turbines of Infinergy’s Burton Wold South windfarm.  When the Managing Director of met Prince Phillip at a reception this week he received an earful.  After questioning the Infinergy man on his ‘belief in fairytales’, the Prince employed his usual tact in describing wind farms as ‘absolutely useless’, claiming they would ‘never work’ and saying the whole situation was a ‘disgrace’.  At 90 years of age, climate change is unlikely to be too much of an inconvenience for the Prince.