These latest developments have added a sense of nervousness to the grains market, the best performing sector this month with all the three major crops of corn, soybeans and wheat trading higher. In their latest World Supply and Demand update, the US Department of Agriculture trimmed ending stocks of US corn and soybeans to a ten and nine year low. Wheat remains supported by Putin’s threat to review some aspects of the Ukraine “grain deal”, which has seen seaborne exports of agriculture products resume, albeit at a much-reduced pace compared with pre-war levels.
Crude oil weakness led by fuel products
Crude oil traded lower in the week, partly driven by losses across fuel products such as gasoline and diesel, but remained within a recently lowered range, with demand concerns once again being the main focus more than offsetting potential supply challenges in the coming months. Growth and demand concerns, as well as the stronger dollar making the cost of fuel increasingly expensive around the world, remains the focus as the market prepares for another growth dampening rate hike from the US FOMC next week.
In addition, demand in China continues to linger after the IEA said the world's largest importer of oil was heading for its biggest annual drop in demand in more than three decades. Meanwhile, the US Department of Energy walked back on its SPR refill stance by saying that it didn’t include a strike price (that was said to be around $80/barrel) and it isn’t likely to occur until after fiscal 2023.
In Europe and increasingly also Asia, elevated prices for gas and power continue to attract substitution demand into fuel products like diesel and heating oil. In addition, the supply side will also be watching the impact of the EU embargo on Russian oil, which will begin impacting supply from December. The IEA in their latest monthly oil market report highlighted the embargo as their reason for lowering Russian supply in early 2023 by 1.9 million barrels per day – a development if not arrested by a peace deal or any other political development in Moscow could see the market turn increasingly tight again. In addition, the current lull in Chinese demand look set to reverse once lockdowns are lifted and, together with the risk of supply tightening, we see potential weakness in Q4 being replaced by renewed strength next year.
European gas prices drop further on EU support plan.
The Dutch TTF (Transfer Title Facility) benchmark gas contract traded lower for a third week as the European Union continues to work on its plans to ease the worst energy crisis since the 1970’s. While the good news is that the price has dropped by 43% since hitting a panic peak on August 26 ahead of the Nord Stream 1 shut down, the bad news is that the price remains more than 12 times above the long-term average.
Russian supply of gas to Europe through the remaining two out of five available pipelines that are still open has slumped by 80% during the past year, with the 285 million cubic meter drop having to be offset by higher imports from Norway and via LNG as well as a reduction in overall demand. Gas demand has already fallen by 15% and looks set to drop further, either through government intervention or through a voluntary reduction from consumers getting squeezed by the current prices for gas and power. In our opinion and assuming a normal winter, a strong push to reduce demand and Russia keeping the remaining flow running for lack of other venues to sell its gas, we believe Europe will scrape through the winter. For now, however, the price of gas needs to remain elevated in order to ensure demand is reduced sufficiently.