Energy - prompt demand concerns
The weak start to the New Year has continued for oil. ICE Brent fell by a further 5.19% yesterday, which left the market trading convincingly below US$80/bbl. Time spreads have also weakened along with the flat price. The prompt ICE Brent spread has slipped back into a contango, after trading stronger over much of the second half of December. Chinese Covid infections are a concern for demand in the immediate term, however, the medium to long-term outlook is more constructive following the change in China’s covid policy.
The oil market is looking better supplied in the near term and risks are likely skewed to the downside. However, our oil balance starts to show a tightening in the market from the second quarter through to the end of the year, which suggests that we should see stronger prices from 2Q23 onwards.
API numbers released overnight show that US crude oil inventories increased by 3.3MMbbls over the last week. Part of the build would have likely been driven by refinery shutdowns along the US Gulf Coast as a result of the extremely cold conditions seen in December. For refined products, gasoline stocks increased by 1.2MMbbls, whilst distillate stocks fell by 2.4MMbbls.
European natural gas prices have also continued their slide. TTF declined by around 10% yesterday, leaving the market at a little over EUR65/MWh- the lowest level since 2021. Mild weather has meant that storage is still looking very comfortable in the middle of winter and milder weather is expected to continue for a while longer. Interestingly, Europe is no longer trading at a premium to spot Asian LNG. In fact, Asia is trading at a premium of more than US$9/MMBtu to TTF, which suggests that we could start to see more LNG cargoes diverted towards Asia at the expense of Europe.
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