Risks of supply disruptions hits energy markets
Daniel Hynes
Senior Commodity Strategist | helping investors and companies navigate macro, political, economic & environmental issues
Highlights
A weaker USD and higher bond yields triggered a short covering rally across energy markets. Improved risk appetite also saw metals gain.
Prices and commentary accurate as of 07:00 Sydney/05:00 Singapore/17:00(-1d) New York/22:00(-1d) London.
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Ahead Today
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Market Commentary
Crude oil prices rebounded sharply as renewed supply disruptions triggered a short covering rally. Hurricane Francine is nearing Louisiana’s coast and on a path that may hit six Gulf Coast refineries and ports. The storm has prompted oil companies to shut in roughly 25% of Gulf crude output. This helped offset a bearish Energy Information Administration report that showed domestic crude oil inventories rose by a surprise 833kbbl last week. The market had been expecting a drawdown, as suggested by the API report earlier in the week showing a 2.79mbbl decline. Gasoline and distillate inventories were also higher, rising 2,310kbbl and 2,308kbbl respectively. This saw implied demand for gasoline fall below 9mb/d for the first time since early May. Markets were also spurred by a weaker USD and higher bond yields following the stronger than expected US inflation print. Oil traders are now looking ahead to IEA’s monthly market report later this week for any signs of a weakening demand outlook. OPEC trimmed its forecast for demand for this year and next but said the market remains balanced. IEA has warned that diminishing demand growth could see inventories gain next year, even if OPEC decides to pause its planned production hikes.
Global gas prices gained as supply risks mounted. The market is bracing for impact from Hurricane Francine, which is expected to make landfall later today. Earlier this week, power flows to Freeports LNG export terminal dropped, indicating a potential production slowdown. Gas supply to the Louisiana-based Cameron LNG plant has also dropped. Feedgas to the Plaquemines LNG has been zero since Tuesday, just as it was preparing to start up operations. This comes as tight supply in the Pacific has driven some spot purchases from Japanese buyers. Three plants in the region – Ichthys LNG, North West Shelf LNG and Malaysia LNG – have reduced production in recent days. This has helped push North Asia LNG prices higher this week. European gas futures were also stronger as traders eye volumes of Russia gas transiting Ukraine. Supply has been at risk following Ukraine’s incursion into Russia near a key transit point. Volumes at the Sudzha plant are expected to drop by nearly a third on Thursday, according to preliminary nominations by the Ukrainian grid.
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Copper led the base metals sector higher amid signs of a pickup in Chinese demand. After rising strongly in July, inventories at Shanghai Exchange warehouses have started to fall. Premiums for refined metal in China have also started to rise. Aluminium prices gained as increasing raw material costs raised the prospect of weaker refined metal output. Prices for alumina have spiked 50% this year to their highest level since March 2022. Meanwhile, aluminium prices are little changed year to date. Smelters without their own alumina supply are facing challenging financial conditions. The risk of trade disruptions also rose after President Putin reportedly asked the government to consider limiting exports of some commodities like nickel and titanium in retaliation for Western sanctions.
Gold was little changed after the stronger inflation print reduced bets on a 50bp cut by the US Federal Reserve at its upcoming meeting.?
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Chart of the Day
Iron ore prices under pressure as inventory at Chinese ports builds
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