Energy Commodities And European Electricity Prices In The Summer

European electricity prices and related energy commodities dipped as we forecasted. Now, we forecast a likely imminent rise in European electricity prices and TTF natural gas futures prices.

Oil, uranium and European carbon credits corrected first, followed by natural gas and coal prices. These leading indicators, along with the summer energy demand decline resulted in the accurate forecast of a June/July electricity price dip.

The situation is now different: so, we think that price increases are likely from here on.

Factors of Note:

• Crude oil price has recently turned to positive/bullish trend.
• Uranium price has recently turned to positive/bullish trend.
• The TTF futures contract switch is this 26 July. This can be a catalyst for trend switch. The days around that period should be watched.
• The TTF sale went exactly to the medium-term trend price - so it was a rather orderly price dip. It’s possible this is a controlled sale prior to the contract switch before a return to an upward trend. Net capital inflow may return around the time of the switch.
• Note that the TTF and European carbon credits are sitting at roughly comparable price levels while capital has started to have net inflow into carbon credits. The inflow into carbon credits can presage expectations of oncoming demand in energy commodities.

Conclusion: TTF natural gas and European electricity prices are set to rise from here (forecast).

The following is a broader review of financial markets. Commodities and Europe’s energy markets are financialized products, so, we always keep an eye on financial flows in currencies, bonds, options, and equities for a full picture and better forecasting.

The previous 4 to 6 weeks have been marked by notable rotation of capital in financial markets. There have been sales and price dips in a series of assets while others have gained, corresponding to capital moving out of some and into others.

The sales have mainly realized profits and the inflow of capital has been into lower priced assets that were being bid up over time. We estimate that a number of commodities were caught up in this circulation/flow.

At the first stage of the circulation in question, commodities, which had previously made enormous price gains were sold, while large cap USA growth companies were bought up for relatively low prices and bid up (NVDA, MSFT, GOOGL, etc.). Now, the big gains in USA equities are being realized through sales, and we observe a net capital inflow into many commodities. Similar patterns were evident in bonds, private credit, FX, gold.

The latest US CPI data of decreased inflation seems the counter-weight to the latest price swings. Accompanying activity seems to have been to sell equities into the CPI news, because, in the context of high USA central bank interest rates, disinflation should help to put upward pressure on equity prices. This scenario permits the possibility of very large sales of equities with some price support to maximize gains by the big sellers. So, selling in to the inflation news can be an effective tactic.

But, the CPI is backward looking because it’s calculated based on historical data. Meanwhile, the current capital bets are about likely about the future. If capital continues to flow into commodities, the bet is likely on oncoming re-acceleration of inflation down the line.

The CPI news helps here as well, because large commodity futures purchases can be made during at a time when the news of CPI slowdown helps put downward pressure on commodity prices.

Notice that high short interest stocks were rising at the same time as profitable companies’ stock prices were dropping. There was a short squeeze in play, forcing leveraged investors to sell good investments to cover the losses in bad ones.