Gas Plunges in Europe On Concern Virus Weakens Economy

(Bloomberg) -- Energy commodities plunged in Europe on concern that lockdowns stemming from the coronavirus outbreak are hurting the economy.

Carbon emissions dropped as much as 13% Monday on ICE Futures to the lowest level since February 2019, undoing some of the commodity’s recent resilience. The front-year Dutch natural gas contract fell 2.8% to its lowest level in more than a decade, and German year-ahead power benchmark slid as much as 4.7%, the lowest since April 2018.

“Confidence will not return until the health crisis abates,” said a report from Engie SA’s energy unit. “The coronavirus pandemic continues to spread faster and faster around the world. The global economy is gradually stalling.”

With Europe now the epicenter of the coronavirus outbreak, residents and businesses are facing increasing restrictions on public life. European Commission president Ursula von der Leyen said in a video message over twitter that she proposes a “temporary restriction on non-essential travel to the European Union” for 30 days. Airlines have suspended many of their scheduled flights as governmetns from Spain to Scandinavia ordered shops and restaurants shut and asked officer workers to stay home.

The measures will weigh on an already weak energy demand in a region that is struggling to grow. European industrial output is set to drop 5% in 2020, Berenberg analysts forecast. Engie said temperatures well above seasonal norms also are depressing demand for gas and heating as well as power prices.

Carbon’s Plunge

The big drop on carbon prices show a turnaround for a commodity that had showed some strength. European polluters had been buying allowances to comply with limits imposed by the bloc for the last year.

With industrial production weakening and airlines consuming less fuel, demand for those certificates is likely to slide. Polluters covered by the Emissions Trading System must hand in permits for their 2019 carbon output by the end of April.

Coal Weak

European coal, which has been consistently falling since the end of 2018, hasn’t seen the downside that other commodities have largely, because it has been trading around a four-year low for much of 2020. North West Europe coal for 2021 up 0.2% to trade at $55.75 a ton in Rotterdam.

Since hitting $100 a ton in Oct. 2018 the dirtiest fossil fuel has been hit by a combination of cheap gas, low demand and government policies implemented to strip coal out of energy systems altogether.

“The number one reason we haven’t seen coal prices react as much as other commodities in recent weeks is that coal prices were already at such depressed levels, in many cases below the marginal costs of supply,” said Joe Aldina, head of coal analytics at S&P Global Platts.

“Risks to European coal demand are clearly to the downside with coronavirus, though there’s not much further that coal demand can fall, so we don’t expect another major leg down in pricing,” he said. “However, with coal stockpiles elevated, we expect little European coal buying for several months and prices could stay at current, depressed levels over that time period.”

If the rest of the European countries decide to have lockdowns of as long as a month, natural gas demand would drop by as much as 5% or by 4 billion cubic meters, said Carlos Torres Diaz, head of gas and power markets at Rystad Energy.

That means utilities will need to reduce their power generation, starting first from coal, followed by gas.

“Power generation economics are still in favor of gas so utilities are likely to reduce coal power as much as possible first,” Diaz said.

©2020 Bloomberg L.P.