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The Wider Selloff Reaches Commodities

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

The wider sell-off reaches commodities
 
Harry Altham
Energy Analyst, EMEA & Asia

The oil complex became part of a wider sell-off in risk assets yesterday, despite the dominance of fundamental tightness in the physical markets. Brent fell by as much as $8 amid a poor seven days for risk assets. Headlines of the rout include the Nasdaq Composite Index - which has fallen by 10% since 4th May, and Bitcoin dipping below $30,000 for the first time since July 2021, as investors seek safe havens amid market turbulence. Meanwhile, the Bloomberg Dollar Spot Index reached its strongest level since May 2020 yesterday – another major factor that could put the brakes on rising commodity prices. This morning, Brent reached 10-day lows before recovering slightly to trade at around $104, while the Oil Volatility Index has reached its highest level since 31st March as instability dominates markets. The Euro Stoxx 50 has risen 1.75% this morning while U.S. equity futures are higher in the pre-open, which could lend support to commodities; the one-month correlation coefficient between the S&P 500 Index has reached a statistically significant 0.61 in signs of a strengthening relationship between oil and equities.

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Brent & S&P 500 Index, with correlation coefficient. Source: Bloomberg
 

Despite this, the fundamentals continue to provide strong tailwinds for oil. Talks between Hungary and the E.U. on the proposed embargo on Russian crude are progressing, and concerns are growing that Russia will struggle to find alternative markets for the 9M bbd of crude and products it exported before the war. Furthermore, Saudi Arabia has stated that it has concerns of a lack of spare capacity among OPEC countries, which it says will continue to hinder OPEC production increases over the coming months; OPEC increased production by just 10,000 bbd in April – the smallest single month increase in production since the group agreed to increase supply to the market last summer amid the revival in global oil demand. With Russia’s production falling by 900,000 bbd in April and forecast to drop by another 1M bbd (according to Russian Finance Minister Anton Siluanov), we expect the fundamentals to return to play the primary role in the oil markets, with the eventual return of post-Omicron Chinese demand also raising expectations of elevated prices into the second half of 2022. 
 
GASOLINE PRICES CONTINUE THEIR MARCH AHEAD OF SUMMER DRIVING SEASON
NYM gasoline continues to surge amid depleting inventories and surging fuel demand ahead of the U.S. summer driving season, with the RBOB/WTI crack surging to reach its second highest ever level at almost $50/bbl, reflecting increasing refinery margins for gasoline. U.S. retail prices reached record highs of $4.37 per gallon – but the IEA (in their summer forecast) asserted that despite the high prices, gasoline demand will be 0.8% higher than in 2021. The crack spread is showing signs of a reversal amid technical indicators showing it to be in overbought conditions (14-day RSI study of 79), although the fundamentals remain bullish for now - as U.S. refiners seek to profit from record refining margins in the Diesel/WTI crack ($64.61 on 1st May). That said, the differential between the NYM Diesel crack and NYM Gasoline crack has narrowed to $3 and continues to move closer; further upside moves in gasoline could see refineries shift focus back to refining into gasoline as profits strengthen – providing some relief to the physical markets ahead of the summer.  
image 36875
Source: Bloomberg.
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