Reduced US export capabilities could not have come at a worse time for Europe where reduced flows on the NordSteam 1 pipeline to Europe has further uprooted the market and driven prices to a demand destructive territory just below €150/MWh ($46.5/MMBtu), around a ten-fold higher price than seen in the run up to last year’s surge. The economic impact on European utilities not receiving the gas they bought under long-term contracts with Gazprom at much lower prices is currently being felt the hardest in Germany, a country whose failed strategy to depend almost exclusively on Russian gas has left many high energy consuming industries exposed.
This past week Uniper, a major energy company, was the first to ask for state help after receiving only 40% of the contractual agreed gas volumes from Gazprom since June 16. In order to make up the shortfall they are forced to buy the gas in the spot market at the mentioned very high levels. With the cost on winter gas already trading close to €150/MWh and with storage injections slowing, only an aggressive reduction in demand, either through voluntary or government intervention will prevent the risk of blackouts this winter.
Crude oil and fuel products remain rangebound and after recording their first, albeit small, monthly loss since last November, and some questions are being raised about the sector’s ability to withstand additional recession-focused selling. We still believe – and fear – that worries about demand destruction will be more than offset by supply constraints. OPEC+ met this week and agreed another small production hike at a time where the group is already trailing their own production target by 2.7 million barrels per day. Having completed the reversal of output cuts made at the start of the pandemic in 2020, the market will focus on what lies ahead, but with most producers being close to maxed out, we are unlikely to see a surprise additional supply response.
The weekly inventory report from the US Energy Information Administration showed US crude stockpiles, despite massive injections from Strategic Petroleum Reserves (SPR), falling to their lowest seasonal level since 2014 while stocks at Cushing, the important delivery hub for WTI crude oil futures dropped to 21.3 million barrels, are also the lowest since 2014. The negative market impact, however, came from finished motor gasoline supplied data which showed that US demand for gasoline is succumbing in a more substantial way to record-high gasoline prices after showing a counter-seasonal decline.
In the short term, we will see a battle between macroeconomic focused traders selling “paper” oil through futures and other financial products as a hedge against recession, and the physical market where price supportive tightness remains. A battle that for now and during the upcoming peak summer holiday period when liquidity dries out may see Brent crude oil trade within the established range between $100 and $125.
Gold and silver
Gold traded below $1800 for the first time in six weeks with focus now on key support around $1780. The weakness being driven by a combination of a stronger dollar, the market pricing in lower forward inflation driven by rate hikes, recession worries reducing the overall appetite for commodity exposure, and after India, the world’s number 2 consumer, increased import taxes. In addition, silver has slumped below $20, dragged lower by continued weakness across industrial metals, especially copper. Faced with these multiple headwinds, investors are reducing their exposure in ETFs while speculators are adding short positions through futures. Reasons for holding gold, such as the hedge against stagflation, geopolitical and financial market risks, have not gone away, but for now with the summer holiday and low liquidity season upon us, investors are scaling back more than gearing up.