Monday, 20 February 2023 / Published in Commodity Insights

Brent and WTI crude oil prices closed lower by about 4% last week to $83/b and $76,50/b respectively, on concerns over a U. S oil supply glut, hawkish Fed commentary, and stronger dollar despite optimism over China’s fuel demand recovery, and Russian output cuts.

U.S.-based WTI crude oil has fallen in three of the past four weeks, losing nearly 7% in that stretch, in response to a potential supply glut in the country following the inventory build, the SPR sales, and surging shale oil production.

Investors turned bearish last week after the United States reported higher-than-expected crude and gasoline inventories builds over the prior week.

On top of that, the Biden administration also announced plans to release 26 million barrels of crude from the SPR-Strategic Petroleum Reserve which could lead to higher stockpiles at Cushing, Oklahoma, the delivery point for WTI contracts, until May.

An economic slowdown could harm fuel demand:

Oil prices have received further pressure lately as investors expect that the stronger-than-expected macroeconomics data (CPI, PPI, jobs reports) could lead to more interest rate hikes by the world’s largest central banks such as the Federal Reserve, ECB, and Bank of England.

Surging interest rates could depress economic activity this year in some of the largest petroleum consumers in the world such as the U.S., China, India, the UK, and the Eurozone, which in turn could fuel a slowdown in oil demand.

Furthermore, a more hawkish Federal Reserve could strengthen the U.S. dollar, making dollar-denominated crude oil more expensive for buyers of other currencies.

Global supply outlook:

Last week, the downward pressure on oil prices came despite the production cuts by Russia and OPEC+ alliance.

Russia plans to cut oil production by 500,000 barrels a day, or around 5% of output in March, in response to the Western powers imposing price caps on its oil and oil products.

This is coming in the heels of pulling out more barrels of oil from the global market, increasing concerns for future oil supply shortages, after the Organization of the Petroleum Exporting Countries and allies, a group known as OPEC+, last October stated it would cut oil production targets by 2 million barrels per day until the end of 2023.

Friday, 17 February 2023 / Published in Commodity Insights

Gold and Silver have been suffering declines this week as the persistently high inflation metrics, the hawkish comments by policymakers, and expectations for higher rate hikes have pushed bond yields and the greenback to yearly highs.

The dollar-denominated Gold fell as low as $1,820/oz, or nearly 1% down, on Friday morning, posting the lowest level since early 2023, while Silver extended recent losses toward a two-month low of $21,20/oz, or 1.50% down, as the DXY- dollar index rallied to a fresh monthly high of 104.50 mark.

Surging dollar and interest rates make the dollar-priced bullions more expensive for buyers with other currencies. At the same time, investors prefer the dollar instead of zero-yielding gold as a haven asset, given that the greenback offers better returns-yields.

Prices of the yellow metal were set to lose between 2% this week, their third straight week in the red, while the prices of the silver metal were set to lose nearly 4%, their fifth straight week in the red.

The non-yielding bullions have turned sharply lower these days as the growing expectations for more rate hikes by the Federal Reserve helped the yield on the 10-year U.S. Treasury to climb to a top of 3.92% on Friday, its highest since December 30, 2022.

The prospect of rising U.S. interest rates bodes poorly for non-yielding assets like Gold and Silver, which drives up their opportunity cost.

Sticky inflation data weigh on bullion prices:

Bullions extended recent losses on Thursday after January’s producer price index, an inflation metric that tracks wholesale prices, rose 0.7% vs 0.4% market anticipated, while the number of Americans filing new claims for unemployment benefits unexpectedly fell last week.

Thursday’s reports followed sticky inflation data from earlier this week that showed robust growth in U.S. retail sales, strong consumer confidence, and a solid labor market in January, stoking fears that the Federal Reserve would have to raise rates higher than previously expected.

Hawkish Fed hits hard gold and silver:

The selloff in gold and silver intensified on Friday morning following comments from St. Louis Federal Reserve President James Bullard that he backed a 50-basis point interest rate hike at the central bank’s previous meeting and that he would not rule out a rate increase of that magnitude at the March FOMC meeting.

Separately, Cleveland Fed President Loretta Mester also said that interest rates will likely rise above 5% as the Fed moves against inflation and that the central bank should have hiked rates by more than 25 bps at its February meeting.

Tuesday, 14 February 2023 / Published in Commodity Insights

Both Brent and WTI crude oil prices trade to near monthly highs of $86/b and $80/b respectively, as energy traders weighed the impact of Friday’s 500,000 bpd Russian output cut decision together with the U.S. administration’s announcement to release further crude oil from its Strategic Petroleum Reserve (SPR).

The U.S. Department of Energy (DOE) announced on Monday that it would sell a further 26 million barrels of oil from the SPR following a record sale of 180 million barrels in 2022 to balance the tight oil market and hit skyrocketing gasoline prices.

The SPR currently stands at 372M barrels – its lowest level since 1983. The latest release is due for bidding on February 28 and is set for delivery between April and June.

The additional SPR sale has temporarily paused last week’s crude oil rally, which saw the price of Brent bouncing off monthly lows of $79/b to as high as $87/b, or up 8% in a week, driven by Russian output cut, optimism over fuel demand recovery in China, and a falling dollar.

Russia, the world’s third-largest oil producer, said on Friday that it would cut crude production in March by 500,000 barrels per day (bpd), or about 5% of output, in retaliation against western oil curbs on its energy exports that were imposed in response to the Ukraine war.

Since Russia has been over-exporting crude oil with deep discounts to finance its war against Ukraine, the 500,000 bpd output cut would bring the country back in line with its OPEC+ quota, after the oil alliance agreed to a 2 million bpd cut in October 2022.

Oil prices got further support last week following the fall of the U.S. dollar to a seven-month low against major currencies, making the dollar-denominated crude oil prices less expensive for buyers with other currencies.

Tuesday, 31 January 2023 / Published in Commodity Insights

Crude oil prices trade in negative territory for a third consecutive trading session in a row, with Brent and WTI prices falling as low as $83/b and $76.50/b respectively on Tuesday morning on growing worries for more supplies from Russia, and further interest rate hikes by major central banks ahead in the week.

Brent crude futures lost $1.20/b, or 1.50% to $83/b so far in the day, after falling by more than 2% on Monday, and adding from another dip by 2% last Friday when it was trading to as high as $88/b on optimism over Chinese reopening, and a softer dollar.

Russia oil exports at any price:

Both Brent and WTI crude oil prices lost over 2% on Monday following reports that Russian President Putin has allowed local energy companies to sell however many barrels at whatever price they can get in the market.

Why is bearish for the oil markets? Because Putin gave the green light to the oil companies to apply any discount necessary to sell their oil to any customer in the world, without setting any floor price for exports.

This event could create headaches within the OPEC group since the cartel declined its overall crude production by 2 million bpd last year to support the falling prices amid the fear of an economic recession.

Interest rate hikes ahead:

Adding pressure on the recent selloff, energy investors are worrying about the coming interest rate hikes from the three largest central banks in the world, which threatens to slow further global economic growth and weaken demand for petroleum products.

Federal Reserve is widely expected to hike interest rates by 25 basis points to 4.50% on Wednesday, Feb. 01, followed by a 50 basis points increase by the European Central Bank and the Bank of England to 3% and 4% respectively on Thursday, Feb. 02, to curb the 40-year record high inflation.

Taking support from the coming Fed’s rate hike, the DXY-U.S. dollar index which tracks the greenback against six major currencies, managed to bounce off from its 7-month low of 101.50 mark hit last week, to just over 102.50, adding extra pressure on the dollar-denominated crude oil prices.

Thursday, 26 January 2023 / Published in Commodity Insights

The U.S.-based Henry hub natural gas prices broke below the much-advertised $3/mmBtu support level, while the European natural gas price of Dutch TTF extended recent losses toward the $55/MWh level, amid a combination of actors such as milder-than-normal weather, lower demand, record-high production, Freeport online, and plenty of LNG supplies.

In contrast to what energy analysts were expecting for the gas prices at the beginning of the winter in the Northern Hemisphere a few months ago, the natural gas price on both sides of the Atlantic has been posting significant losses following a broader selloff in the gas market.

The falling gas prices will have a significant impact on reducing what businesses and households pay for electricity and reducing the effects of energy-driven inflation.

Henry hub gas prices break below $3/mmBtu:

The front-month contract on the New York Mercantile Exchange’s Henry Hub is moving in a range of $2.70-$2.90/mmBtu (or million metric British thermal units), its lowest level since June 2021, and trading nearly 62% down from 14-year high of $10/mmBtu on August 24, 2022.

The sell-off in the U.S.-based gas prices was triggered by the record-high output of more than 100 bcf/d (or billion cubic feet per day), in the last quarter of 2022, the almost full U.S. gas storage, while the higher-than-normal temperatures continued to reduce demand for heating in houses and buildings.

Adding to the negative sentiment, energy traders sold gas contracts after the news that the 2 bcf/d of gas-capacity Texas-based LNG export terminal Freeport is reported to be readying to resume operations in February, after its sudden closure in June, increasing the gas supply in the already over-supplied U.S. market.

European Dutch TTF gas prices plunged on milder weather:

Sellers have also dominated the European gas market lately, with the Amsterdam-based Dutch TTF gas prices trading in a range of €51-€57/MWh (or per megawatt hour), the lowest level since September 2021, and trading nearly 83% down from an all-time high of €342/MWh on August 26, 2022, after Russia cut the gas flows to Europe via Nord Stream 1 pipeline for maintenance reasons.

Dutch TTF prices, Weekly chart

Europe’s wholesale natural gas prices extended losses below their lowest levels since Russia invaded Ukraine on February 24, 2022, as the warmer weather across the continent and the declining industrial activity have weakened the demand for heating and gas-powered energy by more than 15%.

The lower-than-anticipated gas demand has enabled EU countries to use less gas from storage that was built up in anticipation of cuts in supplies from Russia, which was Europe’s main supplier before the war by 40%.

The milder weather has allowed countries to store more gas in their inventory facilities, which stood at nearly 84% at the begging of 2023, importing mainly LNG from the U.S. and Qatar, coupled with gas from Norway, Algeria, and Azerbaijan via pipelines.

The storage levels stand some 30% higher than in 2021 and more than 10% higher than the average of the previous five years.