Weekly Energy Analysis for Week 47Oil CoalGasCO2Electricity

29 November, 2010

Oil market: Brent $86.21/bbl, NYMEX $84.63/bbl

Technical trend ►

Crude oil inventories 1.0 ▲

Gasoline 1,9 ▲

Distillate -0,5 ▼

On the New York Mercantile Exchange, January crude fell 10 cents, or 0.12 percent, to settle at $83.76 a barrel, trading from $82.78 to $84.53. Front-month crude futures ended $2.25, or 2.76 percent, higher on the week, snapping a string of two weekly losses. The Brent front month contract closed at $85,58, up $1,24 or 1,47 percent on the week.

Friday's trading followed a Thursday U.S. Thanksgiving holiday that limited trade. On Wednesday, ahead of the holiday, crude prices jumped more than 3 percent as oil investors focused on the supportive U.S. economic reports, including a drop in initial jobless claims, and shrugged of the stronger dollar and data showing rising crude oil inventories.

U.S. crude oil futures prices settled slightly lower after seesawing in light, post-holiday trading volume on Friday, weighed down by Europe's debt crisis that pushed the euro to a two-month low against the dollar. But reduced throughput in a Canada-U.S. crude oil pipeline, a refinery snag in Texas and geopolitical tensions helped limit losses by crude oil futures and crude futures prices posted a gain for the week. U.S. crude trading volume totaled only 243,802 lots, well below the 465,481 lots traded on the 2009 post-Thanksgiving Friday and 62 percent below the 30-day average.

Coal market: API 2 CIF ARA Cal 2011: $ 105.65/tonneTechnical trend ►

Freight rates RB - ARA 10.38 ▲

Short term marginal cost including CO2 for coal, spot 45.97 ▲

Prompt delivered Europe coal prices rose by around 50 U.S. cents a tonne on Friday as buying interest from one or two utilities against few offers pushed prices back up to the levels seen earlier this month. January DES ARA cargoes were offered at $113.00 a tonne on Friday against bids of $111.00, the highest offers for over a week, but no trades were reported.

The general trend for coal prices into 2011 has been upwards, driven by Asian demand. The arrival of freezing temperatures across much of Europe has pushed power prices up and is expected to mean a strong coal burn while this weather lasts, despite cheap gas prices by comparison with coal.

The Baltic Exchange's main sea freight index, which tracks rates to ship dry commodities, retreated on Thursday with slower cargo activity weighing on sentiment for the larger capesize vessels. The index fell 0.59 percent, or 13 points, to 2,200 points after rising for three days previously. Prior to the move higher it had fallen for 17 straight sessions.

The Baltic's main index has been erratic this year, as it was in 2009, because of swings in Chinese demand for iron ore, the primary ingredient of steel. It reached a 2010 peak of over 4,200 points in May.

API 2 Cal 2011 (CIF ARA)

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European Gas market

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TTF spot NBP spot BEB spot PEG spot

Technical trend ►

UK Demand 414 ▲US Henry Hub price (spot) 4,40 ▲Short term marginal cost incl. CO2 for gas, spot (€/MWh)

50.08 ▲

NBP was off to bullish start this week with prices reaching record levels on Monday due to the forecasted cold spell hitting the region. For example, Q1-11 contract increased 3 ppth on Monday. Subsequent to the general price surge across the curve, prices on NBP remained volatile for the rest of the week.

Average gas demand in the UK this month is above the level seen in the cold November 2008. UK saw demand surged up to 396 mcm/d on Friday. The cold weather have motivated withdrawal from long term storage, and Centrica announced that stocks are at 5 year average levels and it is reasonable to expect that injection phase into long term storage before the winter has ended.

European premium over US Henry Hub continue to attract uncommitted LNG ships to Europe. 12 LNG cargos are expected to dock at UK and Belgium before 11th of December. LNG is expected to continue being diverted to Europe as US storage levels are high (9,6 bcm above its the 5 year average mark), and Asian LNG demand pull remains slow.

TTF was also hit by the cold spell rallying the European gas prices. The recent volatile prices, however, show that the uncertain weather outlook and ample supply situation are bringing out the bears and bulls in the market.

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NBP Winter-11 TTF Winter-11

European Gas - Spot Markets

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CO2 market: EUA Dec. 2010 €14,95/t

Technical trend (EUA 2010) ►

Coal to gas substitution price, spot 11,2 ▲

EU ETS phase 2 short term target ►

EU ETS phase 2 long term target ▲

The EUA Dec-10 contract was fairly unmoved last week, closing Friday at the identical price as Monday; €15,08/t. Average daily traded volume across products and platforms was 19 Mt. Contract-rolling activity is becoming apparent as the closest forward contract expires in less than one month. Open-interest in EUA Dec-10 fell by approx. 3 million units last week while the EUA Dec-11 reached a record interest of 103.8 million. The value in the corresponding CER-contract fell €0,25 and closed Friday at €12,24/t.

The suspension of CERs issued from HFC23-projects was lifted last week, promising that all projects except one will be granted the full amount of secondary CERs. This amounts to a volume of 20 million CERs but it is still uncertain exactly when the credits are released.

Last week also saw another web-based attack on European emissions registries, a so-called Trojan that installs a key-logger on the users’ computers enabling a tracking of log-in information etc. The German registry, the DEHSt, actually closed all transaction activity to ensure that none of its users fell victim of this phishing attempt. At this point, it is unclear whether the attempt had led to any victimized companies.

EU has proposed to ban most credits generated from industrial gas projects from January 2013, four months ahead of submittance of emissions allowances covering 2012. Such projects have generated about 70% of all issued CERs since 2008. As several compliance operators have made long-term investments in this type of project activity, the proposal has received negative reactions. A decision is expected to be made in January/February 2011.

For the coming week, we see the commencement of Cancun-negotiations, trying to achieve a new international agreement replacing Kyoto. This could potentially impact the EU ETS if countries like the USA and China commit to capping their emissions. Expectations are small and unlikely to impact the CO2-price in the short-term.

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Spread (LHS) EUA 2010 (RHS) CER 2010 (RHS)

European electricity year-ahead

• Currently calendar 2011 except UK where the first annual April contract is used

YR-ahead Europe

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UK Electricity market

Technical trend ►

Short term target ►

Long term target ►

The UK power market has been dominated by the arrival of a cold period, with temperatures between 5-8°C below seasonal averages. Consequently demand for gas has increased sharply, reaching 383mcm on the 25th November against 312mcm a week earlier, with demand expected to remain around 400mcm until milder weather arrives. In particular, there was much focus on the gas Q1 contract at the start of the week, with the contract settling around £2/MWh higher on Monday, representing approximately 5% upside. This was driven by fears that the increased drain on Centrica’s Rough storage would leave the market more susceptible to upward price movements during what is normally the coldest period of the year.

Aside from the impact of increased gas prices, front end electricity prices have also been firming due to the tighter supply situation that is emerging. Current nuclear availability has been limited to around 80% of capacity due to unplanned outages and the situation is further exacerbated by exports of 2GW through the French interconnector and the relatively low contribution of wind. Given that colder temperatures are expected to persist well into the first week of December, coupled with expectations of increasing demand, front end electricity and gas prices are likely to remain under pressure until milder weather conditions emerge.

UK OTC base load year+1 (£/MWh)

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German Electricity market

Technical trend ►

10 days weather forecast ►

Plant outages in % 24% ▲

Weather-driven price rally

The cold spell hitting Europe the past week has impacted short-term power prices, rising sharply on a daily basis. High consumption levels pushed prices up €10, reaching a Friday delivery price at €60,02/MWh. Low wind generation levels along with unexpected plant outages added to the rally in prices. Increasing exports over the border to France also supported spot prices as supply margins became tighter. The front-month contract gained on a continuing cold forecast for the coming weeks, trading currently at €49,50/MWh.

Cal-11 found support in the strong prompt prices early in the week as cold weather increased demand and European gas prices climbed but lost momentum by mid-week as clean dark spreads became negative and gas contracts weakened.

Publication of Germany’s IFO business climate index reaching a level above the boom in 2006/07 at 109.3 points, as opposed to 107.6 for October, did not seem to have mentionable impact on forward prices. Q1-11 showed similar weakness, despite the early winter seen at the moment, indicating that market players assume the cold trend will settle back to seasonal average.

For the coming week temperatures are forecasted to drop to about 6 degrees below seasonal average in Germany, a bullish factor for short-term prices, along with high demand and electricity export. There is however some uncertainty tied to higher wind level output as it plays a significant role in the German base-load supply.

Germany YR 2011

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Cal-2011

French electricity market

Technical trend ▼

10 days weather forecast ►

Plant outages 15% ▲

Once again available nuclear capacity failed to meet expectations at the start of the week and with France facing temperatures up to 7°C below seasonal averages, the stage was set for further price strength in the front end contracts on Monday, with week-ahead, December and Q1 contracts all rising.

As with the rest of Europe the main focus is on how long the current cold conditions will last and this sentiment continued to lead the week-ahead contract higher throughout the week. According to RTE a 1°C fall in temperature is sufficient to increase demand by 2.1GW and it is expected that total demand will rise to around 90GW during the peak evening hours on Monday and Tuesday next week. In addition, any gains from returning reactors may be more than offset by increased German demand, due to Germany’s heavier reliance on electrical generated heating.

Compared to many other European power markets, the Q1 contract was surprisingly weak and gave up much of the gains made on Monday throughout the rest of the week. This partly reflects expectations that nuclear capacity will be operating near to full capacity during Q1, which may be somewhat optimistic given the continuous delays for reactors expected back in service. Furthermore it is expected that temperatures will be somewhat milder relative to seasonal averages.

Powernext YR 2011

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Dutch electricity market

Technical trend ►

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The Dutch forward market traded in line with the German market this week. This was illustrated by the spread between the markets remaining fairly unchanged over the week. In line with the region, Cal-11 contract took a dramatic upswing of 1,14 EUR/MWh on Monday, a record price increase not seen since April this year due to the cold spell forecasted in Europe. Despite this increase on Monday, the forward contracts have lost momentum over the week. The softening gas prices placed weighed on the Dutch forward power market.

The current bullish short term market gave some positive support further out on the curve. Nevertheless, the Dutch electricity production was relatively unchanged from last week, which was up one percent.

This is believed to indicate that the market remains relaxed as the cold temperatures lift short term market prices in Continental Europe. The energy complex is still dominated by natural gas powered electricity generation, which is currently producing at 64 percent of total available capacity

Next week we expect forward market prices to stay firm, despite below seasonal average temperatures hitting Europe. The cold spell is expected to be isolated to the short term market, while the forward is expected to take direction from a gas market with a healthy supply situation.

NL Sys Base YR-Ahead

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Nord Pool

Technical trend ►

Hydro balance -35.4 ▼

10 days weather forecast ►

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Power prices are currently supported by cold weather, a significant hydrological capacity deficit and increasing demand. The spot market is reflecting this, coming in well above 60€/MWh, and has steadily increased throughout the week to over 70€/MWh for Friday. The prognoses for the coming days are showing continued bullishness, predicting base-load prices well above 70€/MWh next week. The weather forecast is dry and cold, adding plenty support to prompt prices, as well as to the closest forward contracts.

The hydro balance is now around -32TWh below seasonal norms, a considerable deficit this early in the winter season, potentially reaching -38TWh next week. The Q1-11 contract has lifted €7 in the past week, hinging on strong spot prices and on fears of a long, dry winter.

This has also fed into contracts further out on the curve, with Cal-11 rising almost 4€ to 54,10€/MWh. European power prices is showing the same trend as in the Nordics, as the continent also has been hit by the cold spell. Coal and gas prices are firming, along with carbon.

Low wind generation forecasts and uncertainty around the Swedish nuclear status, currently generating 70% of installed capacity, is adding to the upside potential in prices. Nuclear output is supposedly reaching around 95% by 1 December but there is a margin of uncertainty added to the actual outcome.

Nord Pool YR 2011

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ENOYR-11 30 day MA

Terminology

• US inventory figures: in million barrels• All oil prices: in US dollar• Oil product: Brent crude• Freight rates: Between Richards Bay in South Africa and Benelux, Europe• Freight rates: US dollar per tonne• Short term marginal costs: Euro/MWh• Demand gas: Million cubic meters• Henry Hub price: $/therm• CO2 market: EURO• Hydro balance NP: TWh

Bergen Energi ASAddress: Fantoftveien 38

BERGEN, 5072 E-mail: analysis@bergen-energi.comTel +47 55 36 37 00

Disclaimer This market comment is mainly for information purposes and is aiming to present a general picture of the market. The portfolio management at Bergen Energi may be based on signals not accounted for in this comment.

Written by Anette Gussiås, Anton Eliston, John Brottemsmo and Paul Caile, Analysts