Crude oil gains as OPEC cuts production

Europe’s worsening energy crisis dominated markets. Crude oil and natural gas surged higher, while gains in industrial metals were muted amid rising concerns of weaker economic growth.

Crude oil jumped after OPEC unexpectedly cut output. The producer group announced at a meeting in Vienna that it would trim production by 100kb/d in October. The move effectively reverses the symbolic output hike of the same volume in September. Saudi Arabia and other OPEC members have expressed concerns that prices were falling despite strong fundamentals. This move shows they remain serious about supporting prices, despite the fact the cut will have little impact on the supply/demand dynamics in the short term. Saudi Arabia said after the meeting that the group, which includes Russia, will remain proactive. Sentiment was also supported by signs the rapid revival of the Iran nuclear deal is unlikely. The European Union’s chief diplomat, Josep Borrell, said the country’s supplies are unlikely to return to the market soon, as he becomes less confident of the negotiation process. The gains in Brent crude futures were muted by growing concerns of demand in China.

European natural gas surged higher after Russia halted its biggest gas pipeline to the continent indefinitely. Dutch front month futures traded as high as EUR280/MWh, up 35% on Friday’s close, while electricity prices also increased. Gazprom said that an oil leakage was detected at a gas turbine that helps pump the fuel into the pipeline. It gave no indication when it will be repaired. However, it warned that it doesn’t comply with safety regulations establish by Russian law, suggesting the pipeline may be out of action for the foreseeable future. That raises the risk that Germany won’t meet its target of storage facilities hitting 95% capacity by the start of November. Ultimately, Germany would need to cut natural gas consumption by 15% to keep gas storage facilities from running empty over the winter. To avoid this scenario, it moved to keep two nuclear plants available this winter, in a reversal of recent policy. German chancellor, Olaf Scholz, and French president, Emmanuel Macron, also pledged to help each other. With markets closed in New York, North Asian LNG futures didn’t trade. However, they are expected to rally sharply as European buyers increasingly target Asia for LNG. This will be exacerbated by a delay to the restart of Shell’s Prelude LNG export terminal in Australia after power tripped at the facility.

Base metals were mixed as the European energy crisis added to concerns over a global recession that would weigh on commodities demand. The rising risk of energy shortages in Europe curbing economic growth comes as demand prospects in China worsen. The lockdown of Chengdu was extended to contain a COVID-19 outbreak, while cases of the virus are rising in the southern technology hug of Shenzhen. Most base metals were down sharply at the open before recovering most of those losses. That rebound was supported by concerns of further supply disruptions. Higher European energy prices are likely to constrain output of energy intensive zinc and aluminium smelting.

Sentiment was a little bit more positive in the steel and iron ore market after China increased its support of the economy. PBOC cut the reserve ratio requirement, while Beijing said it would accelerate its stimulus rollout this quarter to recover from the pandemic-related weakness in economic activity. Iron ore futures on the Dalian Exchange climbed 3.7% to CNY695/t.

Gold was steady as safe haven buying emerged amid concerns of weaker economic growth. This helped offset a stronger USD, which normally weighs on investor appetite for the precious metal.