War risk premium lifts crude and fuel prices
The recent aggressive slump across the energy sector amid surging bond yields and the strong dollar accelerating demand worries saw a sharp reversal following the Hamas attack on Israel and subsequent counterattacks on Gaza. There is little doubt that a prolonged Israel-Hamas war could destabilize the Middle East, and in a worst-case scenario reduce global supply after Iran’s foreign minister warned that Tehran-backed militants could open a new front.
Elsewhere, the IEA in their monthly oil market report said that oil’s recent retreat from near $100 a barrel showed prices had climbed to levels that could see demand start to suffer, while OPEC repeated its projection for a record 3 million barrels a day deficit this quarter. Meanwhile, the EIA reported an increase in US oil production to a record 13.2 million barrels a day and the biggest weekly inventory jump since February with refineries operating at their slowest pace since January amid seasonal maintenance.
While the macroeconomic outlook remains challenged and demand shows signs of softening, not least in the US where implied gasoline demand on a four-week average basis shows continued weakness, the prospect of a geopolitical-led supply disruption and continued production restraint from OPEC+ will underpin prices in the weeks ahead.
Having fought so hard to support the price, and in the process giving up revenues, Saudi Arabia and its Middle East neighbors are unlikely to accept much lower prices. This leads us to believe support in WTI and Brent will, and probably already has been established ahead of $80. Barring any geopolitical disruption, the upside for now seems equally limited while the bear steepening of the US yield curve continues to raise stagflation concerns and, with that in mind, Brent may once again settle into a mid-80’s to mid-$90s range, an area we for now would categorize as being a sweet spot, not too cold for producers and not too hot for consumers.
Following a near 15% correction at the start of October, renewed Middle East tensions and fear of supply disruptions have seen Brent crude higher towards $90. Making any predictions for the coming weeks is somewhere near impossible, but we do note that GCC producers, led by Saudi Arabia, hold a very elevated amount of spare capacity that can be released in a worst-case scenario – should they choose to do so.
EU gas prices jump on winter supply worries
The European TTF benchmark gas futures jumped the most since last summer as the war in the Middle East led to a disruption of supply from Israel via Egypt, and Finland suspected a gas pipeline leak in the Baltic Sea was sabotage, fueling concerns about the safety of Europe’s energy infrastructure ahead of the peak winter demand period. This follows the explosions on the Nord Stream pipelines from Russia to Germany last year, for which responsibility has yet to be determined.
The +35% surge which at one point took the price to a high of €56 per MWh for the first time since February, however, got underway after Israel ordered Chevron to shut production at the Tamar gas field. The site supplies pipelined gas to Egypt some of which is then converted into LNG and shipped to Europe. While the disruption is likely to be temporary it nevertheless highlights Europe’s increased dependency on gas imports from other countries than Russia. Despite the very strong rally seen this past week the current price is still small change compared with the €160/MWh seen this time last year, and highlights market that is much better prepared for the coming winter with storage sites across the region being close to full and demand being down by more than 15% as recession and high energy prices hurt several heavy energy consuming industries.