Commodity traders are betting that Europe’s carbon futures will soon catapult higher as Brussels drains the glut of carbon allowances on the market. Prices are likely to smash the all-time record of €30 a tonne within months, profoundly reshaping the EU’s energy architecture. The killer detail in the European Commission’s 140-page climate impact report for 2030 released last week is a "one-off" rebasing of its cap-and-trade Emissions Trading Scheme (ETS) to dry up excess permits, followed by a faster pace of tightening from next year onwards. “The price will go ballistic. The only question is timing,” said Lawson Steele from Berenberg Bank. “Right now we have a big surplus of permits because Covid caused emissions to fall through the floor. But next year there is going to be a 30pc deficit because they are only issuing 600 million permits a year.” Barclays said the rebasing clause has caught markets by surprise and amounts to a new “elephant in the room” for Europe’s climate policy. The Commission is clearly relying on a higher carbon price to do the heavy-lifting as the EU tightens its CO2 target: now a 55pc cut in emissions below 1990 levels this decade, versus 50pc before. It is also a tacit recognition that EU funds for investment in renewables, battery storage, green hydrogen and heat pumps are scarcer than headline figures suggested by the €750bn Recovery Fund. Mr Steele said the carbon price is shifting to a much higher structural level and spreading to more sectors. “There will be a snowball effect. What will stop the price going to infinity is a political reaction, but it could go to triple digits before that happens. Coal can rest in peace,” he said. “I am not a fan of the carbon scheme. It is a big clunky bureaucracy, but governments love it because it generates €18bn in revenue each year. That is as much as the whole Brexit divorce bill, and it could double again.” The commodity trading firm ICIS also expects prices to blow through €100, though it might take several years. This implies a violent shock to Europe’s market pricing mechanism. Investors and capital markets will pull forward the energy switch by acting on the signal. “The Commission thinks they can manage this process, but they have been wrong before. The carbon market could go really wild,” said Phil MacDonald from energy consultants Ember. Carbon futures have already jumped sixfold in three years after Brussels revamped a broken system that had been captured by special interests and become a byword for market illiteracy. It has created a Market Stability Reserve that acts like a central bank, with powers to dial down the permits. While it remains a centralised monopoly, and gives a free pass to some bad polluters, it is acquiring teeth.
If the bulls keep the price of Brent crude above $42.50/barrel continually, it most likely the bulls will push the price within the $45/barrel.
(Bloomberg) -- Saudi Arabia’s warning to OPEC+ cheaters and short-sellers alike helped oil prices stage their biggest weekly rally since June, despite a grim start to the week as industry heavyweights painted a troubling demand picture for the petroleum complex.Futures in New York rose 10% this week following a show of determination by Saudi Arabia, the most influential nation in the Organization of Petroleum Exporting Countries, to defend the market on Thursday. The Saudis hinted they’re prepared for new production cuts, and lambasted OPEC+ members that have cheated on production quotas.Prices briefly fell as much as 1.6% on Friday following an announcement from Libyan military commander Khalifa Haftar that he will allow crude production and exports to resume. But while Haftar reached the agreement with the country’s deputy premier, it was unclear whether the deal that excluded the National Oil Co. would actually restart exports.“Depending on Libyan oil supply coming online seems like it’s a pretty risky bet,” said Michael Lynch, president of Strategic Energy & Economic Research, so traders likely aren’t willing to make sizable wagers on it heading into the weekend. Saudi Arabia’s unambiguous comments on Thursday, though, give market participants the confidence they can “rely on OPEC to keep the taps turned off for a bit longer,” said Lynch.Haftar controls most of eastern Libya and has halted operations and shipments from his territory as part of a campaign against the internationally recognized Tripoli government. The OPEC member is pumping just 80,000 barrels a day, but produced 1.2 million a day last year.Oil reversed last week’s losses, which pushed West Texas Intermediate futures toward $37 a barrel amid a slew of downbeat demand forecasts from the International Energy Agency to Trafigura Group and BP Plc. Helping support prices this week, U.S. government data showed crude and gasoline stockpiles declining. American oil stockpiles are now at their lowest since April.But crude may not be out of the woods just yet, with distillate supplies at record highs and refining margins for the fuel deteriorating in the U.S. and Europe. Meanwhile, rising coronavirus infections in Europe raise the specter of a return to tighter restrictions that have crippled consumption.“The oil markets have made a nice recovery from their lows,” helped by the decline in American crude supplies, said Bill O’Grady, executive vice president at Confluence Investment Management in St. Louis. “But the demand data just doesn’t look all that good.”There is ongoing debate over the state of the global supply picture heading into the end of the year. Among the latest voices to chime in, Goldman Sachs Group Inc. said global oil inventories should draw down this month and the market is likely to see a deficit of 3 million barrels a day in the fourth quarter. That comes after conflicting views this week out of Vitol Group and Trafigura about whether supplies will shrink or head back into surplus by year-end.On a positive note, the spread between WTI’s nearest contracts strengthened to its narrowest contango structure in roughly a month. A narrowing contango signals easing concerns of oversupply.The spread “tends to either blow out or tighten as you approach expiration, but it’s supported by the fundamentals here,” said Bob Yawger, head of the futures division at Mizuho Securities. “When you have the contango start to narrow, owners of crude oil are going to be less likely to stuff barrels into storage.”Companies operating in the Gulf of Mexico may see further storm-related disruption, even as the region still recovers from Hurricane Sally with over 21% of oil production shut in. Among companies preparing for the tropical depression heading for the region, Royal Dutch Shell Plc said it is shutting its Perdido oil and natural gas production hub in the western Gulf of Mexico.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.