European gas surges amid disruptions in Ukraine

Commodities extended losses as the spectre of tighter monetary policy spooks investors. A stronger USD also weighed on investor appetite.

Crude oil prices sank further as the USD advanced and higher inflation raised concerns of weaker economic growth. This comes as negotiations amongst EU member states on sanctions on Russia oil failed to reach an agreement. French President Macron met with Hungarian Prime Minister Orban to discuss the latter’s reluctance to join a proposal to ban Russian oil imports withing six months. In the meantime, the energy industry continued to voice concerns. Saudi Arabia’s oil minister warned that the entire energy market is running out of capacity. His UAE counterpart added that without more global investment, OPEC+ won’t be able to guarantee sufficient oil supplies when demand fully recovers from the pandemic. The US Energy Information Administration reduced its forecast for domestic production to 11.9mb/d, as US drillers raised output at a slower pace. While oil prices fell, US gasoline prices rallied ahead of the summer driving season. The average gasoline price hit USD4.374/gallon, while diesel hit a record of USD5.55/gallon. Low inventories amid Russia’s isolation from the refining market have been the main drivers.

European natural gas prices jumped as Ukraine warned of possible disruption to gas flow amid the war with Russia. Dutch front-month futures rallied as much as 8% on the news, briefly touching EUR100/MWh. Russia supplies 40% of EU’s gas demand, with about a third of that transiting Ukraine. Russian forces have disrupted operations at a compressor station at Sokhranivka, one of two cross border points handling Russia gas. There is much confusion about whether Ukraine’s network operator can switch to the second entry point, Sudzha. This renewed threat of supply disruptions has taken the focus away from weak gas demand in China and mild weather in Europe. North Asia LNG futures were steady as the market weighs up weak demand in China against increased interest from other Asian consumers. South Korea and Japan are said to be making plans to find more cargo for summer. India is also active in the market amid a deadly heatwave. However, industrial demand in the Chinese province of Jiangsu slumped 43% y/y in April according to the National Energy Administration.

Asian coal prices were steady after data showed Indian output of coal rose 29% y/y to 66.58mt in April. Nevertheless, the country remains gripped by a power crisis, which has seen its government order coal-fired power plants that run on imported fuel to operate at full capacity.

Iron ore prices extended recent losses amid signs that demand is being impacted by China’s weak property sector and the ongoing virus curbs. Sunac China Holdings, the country’s fourth-biggest real-estate developer, could default on its dollar bonds. Two other property developers are also delaying debt payments. This comes on top of COVID-19 restrictions that are weighing on economic activity. While Chinese authorities have pledged to take steps to prop up growth, little detail has been provided. Even if it comes, the market is increasingly concerned it won’t be enough to offset the losses seen recently.

Growth concerns also weighed on sentiment in the base metals sector. Copper was among the metals that erased gains to close lower on the LME as investors worry about the economic fallout from strict COVID-19 lockdowns in China. Those restrictions could tighten further, with some Shanghai neighbourhoods announcing quite periods, were residents are allowed outside. Gold also edged lower as the strengthening USD weighed on investor demand.