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Oil Markets Appearing More Concerned About Economic Headwinds Than Loss of Russian Supplies

By: Harry Altham, Energy Analyst, Market Analysis EMEA & Asia

Oil Markets Appearing More Concerned About Economic Headwinds Than Loss of Russian Supplies
 
Harry Altham
Energy Analyst, EMEA & Asia

WTI has fallen by a sizeable 9.5% this week as traders’ concerns grow over weakening demand amid considerable macroeconomic headwinds. This has run alongside a major climbdown in the strength of the prompt spread, which is threatening to move into a contango for the first time since December 2021. That said, we are seeing signs of both crude benchmarks as having entered technically oversold conditions, which leads us to conclude that we could expect to see some correction today – a level close to $84/bbl as a resistance marker is one to watch.

image 55770
Source: Bloomberg, StoneX
sAUDI OIL EXPORTS FALLING, BUT INTERNAL TRANSFERS COULD SUGGEST potential REFINED PRODUCT growth 
Saudi Arabia’s oil exports have fallen by around 580k M/M thus far in November, which is providing an early indication that the Kingdom is taking a pro rata share of the 2M bbd OPEC+ production quota cut set for the month. Interestingly, a deeper analysis of ship-tracking data is showing a rise in internal transfers of crude between Saudi ports in the Persian Gulf. Over 90% of these cargoes are heading towards Ras Tanura, the country’s key refining hub. Interestingly, these internal flows, measured using estimated volume laden in vessels, has increased by 15% M/M in November – although we are expecting a slower final two weeks of the month. Overall, this leads us to believe that Saudi Arabia is likely to ramp-up refined product exports over the coming months; it is increasingly expected that the region will become a critical refining centre for diesel exports to Europe upon the imposition of an embargo on Russian oil products in February (particularly due to short-run refining capacity constraints in India). Overall, we maintain that OPEC+ will cut production by much less than the 2M bbd cut in quotas during the month of November; 70% of OPEC+ members had a 20k bbd plus production deficit to quotas in October – which leads us to believe some countries will maintain or even boost production in order to move closer to those allocated targets. 
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Source: S&P Global Commodity Insights
EUROPE'S GAS INVENTORIES FINALLY FALLING

This week has seen Europe’s gas inventories fall for the first time this winter; peak gas storage utilisation occurred on Sunday 13th November, the latest annual peak since records became available in 2009. Europe’s tanks maxed out at 95.6% full, an 18.5% increase on 2021; mild autumn temperatures and a high availability of LNG cargoes have aided Europe’s strong start to the winter and have buoyed optimism that Europe’s inventories will be sufficient to last the winter. Even though temperatures have dropped across Europe, the depletion rate of gas inventories is four times slower than the corresponding week in 2021. 

Before last winter’s gas price crunch, the forward curve for Dutch TTF was characterised by a long term negative trend with seasonal oscillations. Now, we see a contango market that shows no seasonality, due to Europe’s need to import LNG throughout the year as a result of the closure of pipelines from Russia. 

image 55773
Source: ICE, StoneX

aN OUTLOOK FOR DUTCH TTF PRICES IN 2023
The implication of Europe’s strong start to the winter is a weaker contango structure M/M in the Dutch TTF contract. Now that supplies from Russia have fallen to 12% of 2021 levels, exposure to Russian pipeline fundamentals has significantly decreased, and this is demonstrated in that the forward curve is currently implying stable but elevated prices for European natural gas throughout 2023. In terms of price risk, cold weather fronts and any demand-side policies aiming to reduce prices for consumers will likely have a particularly pronounced effect in the first to second and third calendar spreads, but the reduced exposure to supply-side variability leads us to believe that we will see reduced forward curve volatility beyond the third calendar month. The depletion rate of gas stockpiles will be critical in determining how far north of €100/MWh the spot Dutch TTF contract will be in the short-term, while the forward curve currently implies a 2023 average price above €120/MWh. 
image 55774
Source: ICE, StoneX

 

 
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