European gas extends gains as Russian flows slow further

Commodities stabilised as investors took time to re-evaluate markets after a torrid week of selling. A weaker USD also helped support investor appetite. Energy led the gains, offset by falls in bulk commodities.

Crude oil rebounded, as concerns of an economic slowdown eased. President Biden said that a US recession is not inevitable. This comes after the US Federal Reserve raised rates 75bp and hinted at more aggressive rate hikes, which risk sharply restricting economic growth. The Fed’s Chair Powell is due to testify before lawmakers later this week, where he will outline his view on inflation. Supply side issues were also back in focus, with Libya saying its output had recovered following disruptions to its operations. Daily production is now around 800kb/d, up from 100–200kb/d. Nevertheless, the market remains cautious about disruptions to Russian oil as European sanctions kick in.

European gas extended gains amid signs of further constraints on Russian gas. Gazprom’s CEO Alexey Miller warned that there is no immediate solution for issues with the gas turbines that are essential for the proper functioning of Nord Stream pipeline. Gas flows have dropped sharply in recent days, with the pipeline operating at only 40% of its capacity. Gazprom subsequently opted not to reserve extra capacity to ship gas to Europe via Ukraine at an auction on Monday, signalling supplies may be curbed for longer. The European Commission has said Russia is using its energy for blackmail. Germany’s Economy Minister said that security of supply is currently guaranteed but the situation remains serious. The government has asked Germans to reduce consumption, and it plans to rely more on coal fired power plants. Italy is looking to trigger its emergency gas plan if Russia continues to curb supplies, which would see it ask companies to voluntarily limit energy consumption. With the US market closed, North Asian LNG futures did not trade. However, the tightness in Europe is expected to see increased competition for LNG cargoes in Asia. This comes amid disruption to LNG exports from the US.

European carbon gained after Germany's government said it will bring reserve coal plants back online. However, some of those gains were given back after news that Germany will also reward industries that reduce gas consumption. EUA’s ended the session up 1.95% to EUR84/t.

Base metals edged higher, led by gains in copper and aluminium amid hopes that Chinese demand will recover. Beijing vowed to provide extraordinary support for manufacturers and measures to boost housing demand as it faces lockdowns to curb COVID-19 outbreaks. The focus is likely to settle on mid and downstream manufacturing firms, which would likely lead to a direct improvement in demand for raw materials such as metals. The market is also facing its own supply side issues. Workers at Chile’s state-owned copper producer, Codelco, are threatening to go on strike over wage demands. This comes amid low levels of inventories. LME stockpiles fell further on Monday, raising concerns that supply disruptions may spark further drawdowns.

The promise of more economic support in China failed to boost sentiment in the iron ore market, with futures in Singapore falling more than 7%. This saw the front month contract fall to USD111/t, the lowest level this year. Sentiment remains weak, with spot trades slowing as steel mills conduct maintenance amid weak demand. Expectations of a rebound in the real estate sector have slowly fallen as renewed outbreaks of COVID-19 lead to further lockdowns.

Gold was steady as traders look ahead to Powell’s testimony to the senate. And several Fed members could not rule out another 75bp rise in rates.