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Oil Finally Getting Help from The Dollar

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

Oil Finally Getting Help from The Dollar
 
Harry Altham
Energy Analyst, EMEA & Asia

Brent is extending recent gains again this morning as optimism over China’s oil imports spurs hopes of a sustained recovery. The IEA have released their monthly report today, stating that they see OPEC+ oil supply falling by 850k bbd due to cutbacks by Russia, even as RBC report that the United Arab Emirates may seek to deploy some of its additional productive capacity following $150bn of investments in its infrastructure (which is set to boost capacity to 5M bbd by 2027, current quota is 3M bbd). Overall, the IEA’s outlook is implying significant bullishness this year, with the key finding being a 900k bbd production deficit that is premised upon non-Chinese oil demand growing by in excess of 1M bbd this year – a figure that looks set to be challenged by imported inflation affecting the majority of countries around the globe. 

TECHNICAL SUPPORT FROM THE DOLLAR ADDING IMPETUS TO OIL'S MOVE HIGHER

Crude markets have found increasing support from the recent fall in the dollar, whose cross with the euro is touching nine-month lows and which completed a death cross at year-end. The bearish outlook for the dollar is being supported by the increasing possibility of the Federal Reserve slowing its rate cycle on the back of negative CPI data (-0.1% m/m); falling gasoline and food prices are playing a key role in the decline. Taken on a y/y basis, CPI has fallen from 9.1% in June to 6.5%, however it is the m/m data that are raising expectations of a 25bps hike at the next FOMC meeting at the end of this month   significantly lower than the four 75bps hikes in the autumn. Though this is bearish for the dollar (and therefore supportive for commodities), the risk of returning pressure in energy markets could make the disinflation path a rocky one, although we believe that resurgent open interest (and therefore falling volatility) aligned with a small rise in OPEC+ spare capacity will limit the impact on oil and products more than it had done last winter. For the weeks ahead, watch out for the impact of the death cross; a leg lower could expose Brent and ICE Gasoil further to the upside upon the Russian oil product ban’s imposition on 5th February. 

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Source: Bloomberg, StoneX 
dutch ttf due a correction after an almighty fall

European natural gas markets continue to defy pre-winter expectations of tightness, with Dutch TTF only rising by €1.13MWh today even as a cold snap strikes Northwest Europe. Very few (if any) analysts would have predicted prices to approach €50/MWh as they did yesterday, given Europe’s precarious import situation and an above-average probability of a cold winter. Despite a cold December, Europe’s gas tanks remain over 81% full as of 16th January; the tanks have never been this full this far into winter (beating the record by one day, in January 2020 where maximum tank utilisation was over 2% greater than this year). Prices look set for a correction though, having fallen by over 50% in 33 days; this will be aided by fundamental support – with temperatures not set to rise above three degrees Celsius across much of Germany for at least a week. 

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