Crude oil extends falls as signs of weaker demand emerge

A sharp plunge in energy markets dragged the broader commodity complex into negative territory last week. Concerns of weaker demand drove sentiment lower, offset in some markets by ongoing supply side issues.

Crude oil recorded its biggest weekly decline since early April amid rising concerns of weaker demand. Demand indicators have largely held up, with global air travel improving as international borders are reopened. However, there are signs that high prices have taken the edge off gasoline and distillate demand. US gasoline demand was down around 7% y/y in July. China’s zero-COVID strategy is pushing its recovery further out. We have subsequently revised our short-term oil demand forecast for 2022 and 2023 down by 0.3 and 0.5mb/d, respectively. Oil demand for 2022 is now estimated to rise by 1.8mb/d year-on-year to settle at 99.7mb/d, just short of pre-pandemic highs. That said, the risks of supply shortages remain high. European sanctions have yet to be fully implemented. OPEC’s meagre supply hike highlights the market’s limited capacity to handle further shortages.

European natural gas posted another weekly gain amid ongoing shortages of supply. Dutch front month futures slipped on Friday but were up nearly 3% to end the week at EUR196.32/MWh. Drama over turbines on the Nord Stream pipeline continue to drive concerns of further disruptions. Russia has warned that it needs more documentation to enable a repaired unit to be returned to Russia. However, Germany has repeatedly said there are no technical reasons for the reduction in gas flows. There are three further turbines that are due for maintenance in Canada that could also be caught up in international sanctions. This comes as several gas facilities that are crucial for Norwegian supplies to the UK and Europe are scheduled to start seasonal maintenance next week.

North Asian LNG prices pushed higher last week as competition for LNG increased. The presence of European buyers in the market has seen Asian utilities become more active in the spot market. There have also been some issues impacting supply, including prolonged industrial action at Shell’s Prelude LNG facility and upstream issues in Peru and Egypt. Reports of an early restart of Freeport’s export terminal tempered those concerns. Its shutdown had tightened the LNG market amid strong demand from European and Asian consumers.

European carbon extended recent gains amid strong demand. Rising gas and coal prices have seen expectations of stronger demand for EUA rise. The 7.9% weekly gain was also supported by supply curs in the annual August auction. This may be tempered by EU efforts to reduce consumption by consumers amid shortages of Russian supply.

Sentiment was more positive in the base metal sector, as rising energy shortages raise the prospect of further supply cuts. Glencore warned last week that Europe’s energy crisis poses a substantial threat to supply. It disclosed that its smelters in the region are barely turning a profit. Aluminium, the most energy intensive metal, is also under threat of smelter closures. This comes amid signs of better demand. Copper inventories in China have fallen sharply, while rising premiums suggest demand is improving. State-owned Xinhua news agency also reported that the country will spend CNY150bn on several long-distance power lines to bolster the nations clean energy ambitions.

Gold traded near a one month high as rising geopolitical tensions helped boost safe haven buying. However, this was tempered on Friday after a strong payrolls number suggested the Fed may persist with its aggressive rate hike cycle.