One week ago, OPEC pushed the price of Brent Crude back into the $90/bbl range, recklessly threatening inflation recovery around the world (and making it more likely central banks will raise rates higher for longer.)
As a result, the price remains above $90/bbl, though West Texas Intermediate (WTI) has dipped to $89/bbl. This time two weeks ago, it was starting to look like energy inflation was maybe starting to recede, having hovered in the $80/bbl range for a good while.
However, OPEC has failed to push the price of oil to its desired target of $100/bbl, for now. The Brent price flirted with US$99/bbl midweek, but didn't stay there too long. A lot of that cooling off has to do with demand outlook. This week, the three following bodies downgraded oil demand forecasts for the rest of the year and into 2023:
OPEC itself
The US Department of Energy
The International Energy Agency
While all three entities being in consensus isn’t particularly unusual, it’s significant in that the forecasts all give added weight to an elephant in the room of global trade and investment: a wave of recessions are coming for most major economies.
Oh, and US core inflation is at a 40 year high.
This can be seen in the UK’s GDP August growth data released this week, which logged a contraction. June was a contraction, July went up, but August was back down. Because of 0.1% growth in July, the UK is technically not in a recession, but it’s likely the September data will log another contraction, and then it will be (a recession is widely accepted as kicking in once two consecutive quarters of negative GDP growth are logged.)
You could also make the argument that the UK already is in a recession, which S&P Global believes, regardless of whether or not somebody from the government uses the R-word publicly.
Of course, there’s a lot of self-consciousness about looking silly in these matters which stifles perfectly reasonable debate, and so you generally won’t hear many people come out and offer an individual view.
Unless you’re the CEO of JP Morgan, who also forecasts a recession.
Anyway, let’s move on.
We’ve talked about oil, so a quick recap on gas movements this week.
US: Gas futures remain in the middle-upper US$6.00/GJ range, still down some 25% from a 14-year high over $9/GJ in August. The price is being kept tame by milder than expected weather (read: less households are using heaters,) allowing greater storage volumes.
Interestingly, an increased productivity in wind power in the US is also instrumental in keeping gas prices low. I don’t talk about renewables here much, but, there’s that.
UK: Finally some good news for UK consumers, but not energy traders. About a week ago, UK’s gas storage sites reached full capacity, according to Gas Infrastructure Europe, which has not done much to solicit a bullish rally for the commodity.
EU: Gas prices for the Dutch TTF futures benchmark have remained mostly steady this week, dipping slightly, but still dramatically higher compared to pre-covid levels. Right now, the EU is busy trying to push forward a measure to install a new gas benchmark price, but the process is leading to a lot of debate from member-state constituents.
Reports have broken late week ministers may be heading towards a blanket agreement on what to do. In the meantime, the EU has brokered a deal with Norway which will see the latter do its best to replace the volume of Russian gas flows into the country, so traders over in Europe are very much in “watch and wait” mode right now.
As of mid-afternoon AEST on Friday 14th October, weekly performance for commodities are as below:
Brent Crude: down -3.64%
WTI Crude: down -3.97%
US natgas futures: down -0.63% (up 23% year on year)
EU natgas futures: down -12.47% (up 50% year on year)
UK natgas futures: down -13.43% (up 9.22% year on year)
Uranium: up 2.55% to US$50/lb
Gas trading Australia has not published October data for natgas spot prices yet, but likely remain within the A$6/GJ range.
Despite some falls, high oil prices mean high inflation, which means more interest rate rises. Fears that continued interest rate hikes may trigger a recession continue to dampen sentiment wholemeal; and recession appears to be on the cards globally.
OPEC’s decision to try and push oil back to US$100/bbl hasn’t exactly helped.
A conflation of macro factors are at play. A non-exhaustive list includes:
UK, AU consumer confidence at record lows
Chinese lockdowns to extend as yet another rise in cases hits
Geopolitical tension with regards to Russia continues to flare
UK is basically in a recession already, if you accept a flexible definition
JP Morgan has forecast a recession
IMF say the next five years will see a loss of $4T from global economy that could otherwise have been added in normal environment
Chinese lockdowns remain the status quo with a new caseload high reported this week according to local media
Economic sentiment in most major economies from both individuals and entities large and small remains depressed
A who’s-who of recessions in major economies appear to be on the way through 2023
Southern Hemisphere summer on the way; Northern Hemisphere winter
Geopolitical volatility continues to boost gas futures in Western Europe, echoing into US and Asian markets
Impact of $90/bbl on inflation dynamics is still months away from being revealed
Saturday
Baker Hughes US rig count data
Sunday
20th National Congress of China’s CCP (week-long event)
Tuesday
Chinese GDP growth rate data for Q3
Chinese industrial production data for September
RBA meeting minutes
Wednesday
UK inflation rate data for September
Canada inflation rate data for September (Canada is an oft overlooked major energy producer and exporter)
Thursday
Oz unemployment rate data
Worth noting is that on this Friday’s surprise green day for the ASX (even after the US posted a 40 year high inflation read,) the energy sector is leading the rally up 3.79%.
Despite this:
Woodside (ASX:WDS) one week returns down -2.04%, but,
Beach Energy (ASX:BPT) one week returns up 0.78%
Santos Limited (ASX:STO) one week returns up 0.52%
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