Crude oil fluctuates as supply disruptions deepen

Concern of supply disruptions amid the Ukraine conflict continue to impact commodity markets. Metals led the complex higher, while the rally in energy markets paused as traders took stock of the situation.

The rally in crude oil was halted on signs of imminent Iran nuclear deal. Brent crude traded just under USD120/bbl earlier in the session as the Ukraine conflict continued to disrupt the market. Due to a combination of financial sanctions and the increasing reluctance of companies to do business with Russia, we estimate Russia’s oil supply could already be down by 1mb/d. Overall, nearly 5mb/d of Russian crude could be struggling to find a buyer. Spare capacity is expected to fall to 1.8mb/d in coming months. US shale oil producers are reluctant to boost output significantly. The release of strategic oil reserves makes up barely a drop in the ocean of requirement. However, prices eased back from their highs after IAEA chief Rafael Mariano Grossi said his trip to Tehran could pave the way to reviving the Iran nuclear deal. This could see the return of country’s oil output to the international market. Even so, it might take until the end of the year for Iran to ramp up exports by a potential 1mb/d. There are also other supply issues to navigate. Political chaos in Libya could result in further supply disruptions. Two ministers were kidnapped prior to a swearing in ceremony of a new government amid an escalating standoff between factions. Amid all this, crude output at Libya’s Sharara field was halted after an unknown group shut down a main valve.

European natural gas suffered a rollercoaster ride amid the Ukraine conflict. Dutch front month futures rallied to nearly EUR200/MWh in early trade, before giving back all those gains late in the session. The volatility comes as the threat of supply disruptions increases, although Russian gas flows to the continent remain steady. The EU has sought to remove Russia’s most-favoured nation status at the WTO, which could see result in further tariffs. IEA’s Fatih Birol said Europe must act quickly to be ready to face considerable uncertainty over Russian gas supplies next winter. The EU can slash Russian imports by a third through more LNG, higher renewable generation, and energy efficiency gains. North Asian LNG futures rallied sharply as the spectre of increased competition from Europe rises. The German government is moving to buy EUR1.5bn of LNG as part of its efforts to diversify the country’s energy supplies. This comes amid relatively low inventories in Asia, which has seen consumers keen to restock ahead of the northern hemisphere summer. JKM futures for April ended the session up 13.2% to USD43.60/MMBtu.

Metals markets surged, fuelled by trade turmoil and the increasing economic isolation of Russia. Aluminium and nickel led the gains as fears of supply disruptions continue to persist. The fears emanate from the continued pullback from big corporates in doing business with Russia. Alcoa, the largest US aluminium producer said it would stop selling products to Russian companies and halt buying raw materials from the country. Global energy prices are also a headache for the industry. Aluminium and nickel are the most energy intensive metals in the complex. Meaning record high natural gas and coal prices could see costs skyrocket.

Gold was steady, with investors weighing up the outlook for higher interest rates against the economic risks from the Ukraine conflict, which is fuelling strong safe have demand.

Iron ore futures rallied to a six-month high, boosted by growing expectations of stronger Chinese demand. China has reiterated its commitment to more infrastructure spending this year. Positive sentiment was boosted by the nation’s manufacturing PMI showing an improvement in February.