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Federal Reserve Sends Oil South, Russia Sends Gas North

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

Federal Reserve Sends Oil South, Russia Sends Gas North
 
Harry Altham
Energy Analyst, EMEA & Asia

The FOMC meeting has dominated equity, commodity and bond markets, as Fed Chair Jay Powell announced a 75-basis point rise in benchmark interest rates (the largest single-meeting increase since 1994). Chair Powell stated that such large rises would remain extremely uncommon, although continued disruption to global food supply chains due to war in Ukraine will cause further uncertainty. More aggressive balance sheet tightening and interest rate hikes send the signal that the FOMC will prioritise price-level control; this gave reassurance to equity markets which saw a first daily rise in five days – although the NASDAQ composite index fell by 2% this morning on fears of a wider economic slowdown. Commodities took the news differently; energy commodities saw a period of selling as long-term demand concerns dominated trader sentiment. Brent is testing its support level at $118.53 (21 day moving average), while timespreads have narrowed due to relative strength further down the forward curve. We expect inflationary pressures to impact emerging economies’ oil demand before their developed counterparts. United States oil demand could see sharper seasonal declines after the summer season (relative to pre-pandemic seasonal adjustments); such data is likely to significantly reduce the steeply backwardated nature of energy forward curves moving into 2023. 

image 40848
Brent, Bloomberg Dollar Index, S&P Index and Ten-year Yield. Source: Bloomberg
Data from the IEA showed marginally weaker oil product demand last week, which can largely be attributed to the prior week’s strength over the Memorial Day weekend. Total gasoline supplied across the U.S. was at 9.09M bbd last week (9.19M previous week); similar falls were seen across the middle distillate products. Gasoline inventories fell due to increasing exports to product-starved Europe, while distillate inventories rose by over 700k bbl. In terms of price action, we have seen the first reduction in U.S. retail gasoline prices in three weeks (from a record $5.21/gallon in New York yesterday), following a period in which front-month RBOB prices have dipped below $400 and futures spreads have narrowed. That said, the 3-2-1 crack spread is widening due to surging Heating Oil prices to around $450. We expect elevated middle distillate prices to continue, particularly following a recent IEA report which stated that global refining capacity will not rise at a sufficient pace to alleviate the global diesel shortage.
image 40850
Source: U.S. Department of Energy, StoneX.
russia's gas supply cut through nord stream 1 could be a major problem for europe
 

European natural gas prices have reached highs not seen since March, due to Gazprom’s shuttering of a gas compressor in the Nord Stream 1 pipeline. The move is in apparent retaliation for Siemens’ failure to return equipment that had been lent to Canada (sanctions are being blamed for the non return), and the move has caused gas shipments through Nord Stream 1 to fall by 40% compared to last week (100mcm/d versus 167mcm/d full capacity). Germany’s vice-chancellor, Robert Habeck, has accused Russia of politicising the issue. Europe is importing 29% less gas from Russia than June 2021 and is feeling the strain from a three-week outage at a US liquefaction plant that is responsible for around 15% of total E.U. LNG imports – meaning Europe could start falling behind its stringent storage replenishment schedule (90% full by November 2022). Due to limited LNG terminal capacity in Europe, Russian gas is still vital for Europe, and this reduction in supply is a major concern. It will reduce Russian supplies by around 10% (versus pre-war flow), and Europe only has LNG terminal capacity to cover a 20% drop – meaning that any further disruption will seriously threaten Europe’s gas fundamentals as we move towards seasonally high demand during the winter months.  

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