Energy - edging closer to a nuclear deal
Oil is under further pressure. ICE Brent settled more than 3% lower yesterday, whilst WTI broke below US$90/bbl. This weakness has carried through into early morning trading today. Weaker than expected Chinese data has raised demand concerns once again, not just for oil, but for the broader commodities complex. As mentioned in yesterday’s note, refinery activity in July fell to its lowest levels since March 2020, whilst apparent demand was down around 10% YoY. These demand concerns have coincided with a recovery in the USD, which surged yesterday.
Prospects of an Iranian nuclear deal have only weighed further on the market. Iran has reportedly responded to the EU’s proposal for a resumption of the Iranian nuclear deal. And the Iranians expect to receive a response in the next couple of days. The Iranian foreign minister is of the view that a deal could be reached in the next few days, although it will require some ‘flexibility’ from the US. As for the US’ stance, they will reportedly relay their views directly to EU negotiators. A revival of the deal and lifting of oil sanctions could potentially see Iran increasing oil supply in the region of 1.3MMbbls/d over time, which would help to ease some of the expected tightness in the oil market over 2H23.
While the short term outlook appears more negative, the longer term outlook is still somewhat constructive. US drilling activity is increasing, although the pace has been slower than we have seen in previous upcycles. US producers still seem to be relying on drilled but uncompleted wells (DUCs). The latest drilling productivity report released by the EIA yesterday shows that DUC inventory fell by 20 over July, to leave the total number of DUCs at 4,277- the lowest since at least December 2013. We have seen 25 consecutive months of declines in the DUC inventory, falling by 4,530 over that period. US producers have relied on DUCs to sustain production post Covid, however, given the low inventory, producers will be unable to rely on DUCs moving forward, instead we will need to see a further increase in drilling activity.
Hot weather in Europe has provided a boost to European natural gas prices. TTF settled almost 6.8% higher yesterday, whilst prices hit EUR230/MWh at one stage yesterday- levels we have not seen since early March. However, European gas storage continues to edge higher, reaching almost 75%, which is in-line with the 5-year average and well above the 62% seen at this stage last year. Assuming we do not see any further reductions in Russian gas flows, the EU should hit its target of having storage 80% full by 1 November. However, that is a big assumption to make in the current environment.
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