Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Head of Commodity Strategy
Summary: US natural gas prices slumped on Tuesday by the most in ten months, leaving a lot of traders scrambling to reduce their long exposure at a time where extreme weather developments in the US have seen a price supportive spike in demand as well as a major but temporary slump in production. Price movements and volatility that once again highlights why 'natty' needs to be treated with respect and a great deal of caution
US natural gas prices slumped on Tuesday by the most in ten months, leaving a lot of traders scrambling to reduce their long exposure at a time where extreme weather developments in the US have seen a price supportive spike in demand as well as a major slump in production. A polar vortex sending frigid temperatures across the US this past week has resulted in record demand for gas, the fuel of choice for power generators over coal as gas prices remain relatively low, thereby acceleration withdrawals from underground storage facilities. This follows a relatively mild December where withdrawals were lower than December 2022, amid weaker demand for heating and a strong increase in production relative to the prior year.
The below charts highlight some of the recent extremes, not least the sharp rise in heating degree days, a measurement designed to quantify the demand for energy needed to heat a building, but also how the winter ‘bomb’ has forced a temporary reduction in supply to a 13-month due primarily to freeze-offs, when low temperatures freeze wells and other equipment. Overall, these developments have led to a record demand for gas, the impact of which will become visible in the coming weeks when total inventories look set to show an accelerated drop, thereby reducing the current excess of stocks relative to the five-year average, currently at 11.8%.
From a trading perspective, the short-term direction of gold and silver will continue to be dictated by incoming economic data and their impact on the mentioned timing and pace of future rate cuts. A situation made clear on Monday when ECB’s Holzmann pushed back against the market’s current pricing of six quarter percent cuts by the European Central Bank this year, giving lingering inflation and geopolitical risks. However, by the time his comments were contradicted by Villeroy, another ECB member, who said that cuts are very likely in 2024 but the timing remains uncertain, the technical damage had already been done resulting in selling from recently established longs.
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