Energy Spotlight: New Shanghai lockdowns startle, Brent still above $120/bbl

The S&P/ASX 200 Energy Index is down -1.43% on Friday after a week of mostly strong activity driven by raised oil prices toward $120/bb/ (both Brent and WTI).

One week performance for the index in mid-afternoon trades AEST sits at 6.19%, exactly where it was last Friday.

Price headwinds

• Late week revelations that parts of Shanghai is going back into lockdown as covid re-emerges have helped nudge the price back down slightly from its trajectory towards $125/bbl

• In the last five days, both OECD and the World Bank have issued warnings on extended global inflation. 

Price drivers

• Looking at the US gas market, a fire at a Freeport LNG facility in Texas has caused a shutdown for at least three weeks; Goldman Sachs awaits more information before updating its price forecast

• Barclays has raised its price forecast for Brent by $11/bbl as the bank claims dwindling global capacity will cause upward pressure

• Ongoing risks of volatile 2022 Gulf of Mexico Hurricane system, coupled with Freeport LNG fire, could promote bullish atmosphere for both oil and gas if more disruptions emerge 

(Source: TradingEconomics) The shape of Brent Crude charts over the last week

When it looked like we were finally out of the woods, the upwards progress of the oil price this week has reversed slightly back into the low $120s range as new lockdowns in Shanghai dampen bullish sentiments for the oil price. 

High ongoing demand for the oil in the US has seen the price stay within a three-month-high range, despite fears global demand will take a hit with Shanghai residents forced back inside. 

The coming days could see downward (or upward) swings, but it’s worth noting that the price of Brent stayed firmly at around $110/bbl during the last set of lockdowns in Shanghai.

Interestingly, lockdowns in Beijing did not lead to a significant further decline. 

This time around, the price appears to be staying firm at around $120/bbl—for now, at least. 

Tight supply & high demand

Globally, the current consensus for the oil market is that extra capacity is low, supplies are tight, and demand from major jurisdictions remains high.

Saudi Arabia is the only country with significant extra capacity. 

Tight supply has helped keep the price of crude buoyant. The US and Europe are both heading into the Northern Summer, with demand for vehicle fuel projected to remain strong. 

Cars get limited shelf life

Speaking of cars—the European Parliament this week agreed to ban combustion engine vehicles in all member countries from 2035. 

The European Central Bank is to raise its interest rate next week, though, at a current rate of -0.50%, this is unlikely to be felt as strongly as it has been in other countries like Australia, England, and the US.

ECB president Christine Lagarde told the BBC the ECB interest rate could be above 0% by September. 

Meantime, Australian ministers met with new ALP Energy minister Chris Bowen to discuss an ongoing gas price spike, with prices on the east coast approaching $800/GJ without the help of pricing mechanisms. 

Bowen said the first meeting was productive, but ultimately, little came of the get-together, and factors driving up prices haven’t gone anywhere. 

What to look out for next week 

Over the weekend, Baker Hughes will release its latest total rig count for Week 23 of June, giving an idea of the total number of assets live in the US at this time. 

Industrial Production data for April is published by Japan on Tuesday and India's Wholesale Price Index (WPI) data for fuel comes out on the same day. 

On Wednesday, the American Petroleum Institute updates its crude oil stock change data for June.

On Wednesday, the International Energy Agency (IEA) releases its latest Oil Market Report.

On Thursday, the Fed makes a new interest rate decision, with forecasts suggesting a rise of 50bps. The Bank of England does the same.

Also on Thursday, the US publishes EIA natural gas stocks change data for June. 

On Friday, the Bank of Japan makes its own interest rate decision.

Woodside 

Woodside Petroleum (ASX:WDS) is down -1.75% heading into the last hour of trade. 

1 week performance sits at 9.51%, 2022 YTD performance is at 58.55%. 

Santos 

Santos Limited (ASX:STO) is down -1.39% as a shock to oil prices appears to conflate with Friday sell-offs after a strong week of energy performance. 

1 week performance 2.52%, 2022 YTD growth is at 35.34%. 

Beach Energy 

Last but not least, Beach Energy (ASX:BPT) is down -0.80% to $1.87. 

YTD performance is at 48.41%, still up nearly 20% compared to where it was a fortnight ago. 

Beach Energy's three month charts compared to the energy index (XEJ)