Energy Market

Summary:  EU gas and power prices trade lower today after rallying on Monday when markets responded to the Russia's latest strike against Europe by closing the Nord Stream 1 pipeline. A decision that according to Russian comments will not resume in full until the “collective west” lifts sanctions against Moscow over its invasion of Ukraine. However, the fact gas and power prices trade 35% and 52% respectively below the panic peaks seen in the aftermath of the Nord Stream 1 maintenance announcement on August 26, show the markets are looking to Friday's EU summit for solutions and answers to how Europe can mitigate the immediate threat to supplies EU gas and power prices trades lower on Tuesday after rallying on Monday after Gazprom on Friday announced the Nord Stream 1 pipeline instead of opening following three days of maintenance would remain shut indefinitely. While an oil leak at the last compressor unit still in operation was used as explanation, the surprise decision came shortly after the G7 had announced a plan to cap prices on Russian oil. The energy war has therefore escalated further, and Europe look set to lose around 30 mcm/d or 4% of its gas supply.  While storage levels across the Euro area have grown rapidly in recent weeks due to surging imports of LNG, the prospect for rationing and further initiatives to curb demand for gas and power prices will attract an increased focus from politicians across the region. This in order to mitigate the destructive economic impact of surging prices ahead of peak winter demand season. However, the fact gas and power prices trade 35% and 52% respectively below the panic peaks seen in the aftermath of the Nord Stream 1 maintenance announcement, show markets looking for policy makers to introduce measures to ease concerns within Europe.  EU leaders will meet this Friday to discuss a historic intervention in the energy market that may lead to price caps and other measures being introduced in order to limit the disruptions to consumers and industry from soaring and illiquid pricing markets. However, given the current limits on generation capacity, much of them due to Russia’s cutting off gas supplies, some sort of rationing plan may also be needed. The draft that has been put forward by the Czech-led presidency of the EU and seen by several news outlets is focusing on five primary areas: Decoupling/limiting the impact of gas on the price of electricity  Increasing liquidity in the market Coordinated demand reduction measures for electricity  Limiting the revenues of non-gas electricity producers (ex. wind, solar and coal)  Impact of the EU Emissions Trading System (EU ETS) EU electricity pricing structure at the core of the problem.  Commodity markets tend to be priced at the margin, and so does electricity. This system basically means that gas-fired power stations often ends up dictating the wholesale electricity price for the rest of the market, even though renewable power and recently also coal, can be produced more cheaply. It is this market structure that in recent months with surging gas prices has helped drive power prices to previous unimaginable levels, peaking last Monday when German year ahead power briefly traded above €1,000/MWh, the equivalent of $1,700 dollars per barrel of crude oil equivalent.  Decoupling the price of power from surging gas prices has already been implemented in Spain and Portugal, two countries that benefit from having limited energy connections with the rest of Europe, as well as Greece. Across Europe such a system would work by charging non-gas power producers the difference between the agreed price limit and the actual market price - currently inflated due to high gas prices - that they receive for energy. The increased revenue from this surcharge should be shared among consumers while also support power generators forced to produce the marginal megawatt hour at a loss. Between 1990 and up until 2019, the year before the global pandemic was followed by increased challenges with Russian gas supplies, Europe had seen the share of gas versus other energy sources rise from around 20% to 25%. With current high prices for gas this part of Europe’s energy mix sets the overall price for power, hence discussions to move towards an average or weighted average power price, the result of which would lead to lower consumer prices. However, in this twitter thread my colleague Peter Garnry highlights the reasons why a change in the benchmark pricing of power will not reduce the overall cost, only redistribute it from consumers to utilities who then would need government support in order to avoid bankruptcy.    Source: https://www.home.saxo/content/articles/commodities/eu-fires-up-plans-to-cap-runaway-power-prices-06092022

The Commodities Feed: Stronger middle distillates Oil prices strengthened on the back of stronger buying in the physical market. However, a more hawkish tone from the US Federal Reserve will likely provide some resistance to the market.   Energy: Middle distillate strength The oil market strengthened yesterday with ICE Brent settling a little more than 1.6% higher on the day. Stronger buying from Asian refiners more recently has been supportive, whilst Chinese monetary easing earlier in the week has also been helpful. The move has seen Brent trade back above the 50-day moving average. However, hawkish comments from the US Fed chairman overnight suggest that oil might struggle to hold onto this momentum in the immediate term. API numbers released overnight show that US crude oil inventories fell by 1.2MMbbls over the last week, whilst the market was expecting a small build of around 450Mbbls. Meanwhile, gasoline inventories increased by 2.9MMbbls, whilst distillate stocks fell by 301Mbbls. The more widely followed EIA numbers will be released later today.   Middle distillates continue to enjoy some strength with the prompt ICE gasoil crack trading above US$20/bbl, whilst the prompt ICE gasoil timespread has also traded into deeper backwardation, almost hitting US$20/t earlier this week. Gasoil inventories in the ARA region continue to trend lower (after the strong build late last year/earlier this year), which has seen levels fall below the five-year average for this time of year. Refinery maintenance in the Mediterranean and some unplanned outages in Europe recently have provided some support to middle distillates. This support may persist in the short term, however, the eventual return of disrupted capacity and the ramping up of new capacity in the Middle East should help ease this short-term tightness.

The Commodities Feed: Positive US macro data increases likelihood of further rate hikes Oil prices came under pressure yesterday despite better-than-expected macro data from the US. The oil market instead is focused on the implications of this stronger data - the potential for further rate hikes.   Energy - Brent-Dubai spread flip The oil market sold off quite aggressively yesterday following a raft of stronger-than-expected data from the US with durable goods orders surprisingly climbing in May. New home purchases also came in much better than expected, whilst consumer confidence rose to its highest level since early 2022. This strong set of data once again suggests that the Fed will likely have to hike rates further, which is obviously aligned with Jerome Powell’s testimony last week. Equity markets took the data as a positive sign. However, the oil market did not. ICE Brent settled almost 2.6% lower yesterday.   Overnight the API released weekly US inventory numbers which showed that US crude oil inventories fell by 2.41MMbbls over the last week, which is more than the roughly 1.5MMbbls decline the market was expecting. As for refined products, gasoline inventories fell by 2.85MMbbls, while distillate fuel oil stocks increased by 780Mbbls. The more widely followed EIA report will be released later today.   The Brent-Dubai spread has continued to see significant weakness over the last month  - a trend that has been at play since late last year. However, the spread now sees Brent trading at a discount to Dubai. This is fairly unusual, as the Dubai benchmark reflects a lower quality of crude oil relative to Brent. OPEC+ supply cuts have played an important role in the narrowing of the spread, while the expectation that Saudi Arabia may extend its additional voluntary cut of 1MMbbls/d beyond July will also be contributing to the relative strength in Dubai. However, the move in the spread should see Asian buyers looking to the Atlantic Basin for cheaper barrels.    

Poland's current account surplus with net exports to support GDP growth Poland’s balance of payments data for May generally surprised on the positive side. The current account surplus exceeded consensus. Its balance on a 12-month rolling basis is approaching 0% of GDP as the country benefits from a sizeable improvement in terms of trade, in particular falling prices of energy commodities as compared with 2022.   The current account surplus widened to €1.4bn in May compared with €0.5bn in April and was clearly above consensus and our forecast (€0.6bn). On a 12-month basis, we estimate that the current account balance improved to -0.3% of GDP in May from -0.7% of GDP in April. At the same time, the merchandise trade surplus in May (€1.1bn) was noticeably higher than in April (€0.3bn) and improved on a 12-month basis to -1.2% of GDP from -1.6%of GDP in the previous month. In the current account structure, a traditional surplus in trade in services of €3.4bn outweighed a primary income deficit of €2.9bn, and the secondary income account deficit was €0.3bn. The merchandise trade data suggests that net exports is the key area of support for second quarter GDP against a backdrop of weak domestic demand. This is taking place despite stagnation in the eurozone and the German economy, which in the second quarter of 2023 may record its third consecutive quarterly decline in real GDP. This last happened during the 2008-09 financial crisis. According to the CSO's goods turnover data, 60% of Polish exports have gone to the eurozone so far this year, almost half of them to Germany. The exports growth (nominal) expressed in euro rebounded slightly to 3.3% year-on-year, albeit from a bottom in April, when growth was 2.6% YoY. At the same time, the 6.2% YoY fall in the value of imports was shallower than in April (-8.9% YoY). According to the National Bank of Poland (NBP), export prices are growing at a near-zero annual rate, while the YoY decline in import prices is deepening. May was the third consecutive month of decline in the value of imports. This was due to both a favourable decline in import prices (especially energy) and the weakness of domestic demand in the second quarter, as indicated by e.g. retail sales or real wages data. Poland – as a net importer of energy – benefits from normalisation on the European energy market in 2023. The NBP communiqué underlines an increase in exports of the automotive sector, including strong growth in sales of lithium-ion batteries and commercial vehicles. In imports, the value of five of the six main categories of goods fell, the strongest in intermediate goods, fuels and consumer goods. Only the value of imports of transport equipment increased. Today's data will support investors' generally positive sentiment towards the zloty and other regional currencies in recent months. Improving exporters' performance against weak imports will imply a positive contribution of net exports to economic growth in the second quarter and throughout 2023. For the year as a whole, we expect a 1.5% of GDP current account surplus after a 3.0% of GDP deficit in 2022. The main risk factors for the current account balance this year remain arms spending, the increase in which is mainly being met by purchases abroad following the start of the Russian war in Ukraine.

Energy The oil market looks like it is going to continue to tighten as OPEC+ delivers on their pledges and as China improves business conditions. Energy traders will have a lot to stay on top of this week.  In addition to the global flash PMI readings, a handful of major energy companies earnings, and the standard weekly stockpile data points, there will be a few energy conferences which could provide some insight for the future shifts with supply and demand. Key earnings from Shell, TotalEnergies, Exxon and Chevron will provide key insights on capex spending and expectations for future drilling.  The G20 Energy Transitions Ministerial meeting will focus on clean initiatives.  The 5th International Conference on Power and Energy Technology will provide insights on Chinese crude demand outlooks.  

The Commodities Feed: Supply risks grow Russia’s bombing of port infrastructure along the Danube river in Ukraine has pushed grain prices significantly higher. This escalation risks spilling over into other parts of the commodities complex, particularly energy.   Energy – Oil marches higher Having struggled to break convincingly above US$80/bbl over the last week or so, Brent settled above US$82/bbl yesterday and in doing so broke above the 200-day moving average. The market would have taken comfort from China’s Politburo meeting where the government said it would provide further support to the property sector, stimulate consumption and tackle local government debt. China is key for global oil demand growth this year and the market has been getting increasingly concerned over the weaker-than-expected economic recovery, so any support measures will be helpful in easing some of these concerns. On the supply side, whilst remote for now, risks are growing following Russia’s escalation and bombing of Ukrainian port infrastructure along the Danube River. Whilst this is not a direct threat to energy markets, there are worries that this could spill over into other markets, particularly after Ukraine last week said that any ships heading to Russian Black Sea ports could be treated as potential military targets (in response to a similar statement from Russia). Russia ships almost 500Mbbls/d from the Black Sea port of Novorossiysk, while the CPC terminal in the port exports around 1.2MMbbls/d of Kazakh oil. Therefore, it is not too surprising that the market is starting to become a little nervous over a potential supply disruption, even if it is a remote risk for now.   In addition, stronger refinery margins are likely adding to some optimism over demand, although the strength in refinery margins appears to be more supply-driven than demand-driven at the moment. The strength has been driven predominantly by gasoline and middle distillate cracks, while fuel oil cracks are also holding relatively firm. European gasoline cracks have hit US$30/bbl, the highest levels since July last year. The strength in the gasoline market has been blamed on several factors, including tightness in the octane market, while hot weather in parts of Europe also appears to have led to some refinery disruptions. The initial strength in margins was driven by middle distillates, which would have led to some yield switching (gasoline to gasoil), however the more recent relative strength in gasoline could now see yields switching back (gasoil to gasoline). As a result, this is also offering continued support to middle distillate cracks. In addition, in the US, an unplanned outage at Exxon’s 540Mbbls/d Baton Rouge refinery, the fifth largest refinery in the US, is also providing some strength to margins. European natural gas prices also rallied significantly yesterday with TTF settling 8.5% higher on the day, taking it back above EUR30/MWh. There will be concerns over what further escalation in Ukraine could mean for the small but still important amount of Russian pipeline gas that runs through Ukraine into the EU. Fundamentally though, the European market remains in a very comfortable position with storge almost 84% full. While uncertainty may provide support to prices in the near term, we expect prices to come under pressure over much of the third quarter, given storage will be full well ahead of the next heating season (assuming no significant supply disruptions).  

The Commodities Feed: All eyes on the Fed The Federal Reserve is expected to raise rates by 25bp today, and markets will be on the lookout for any signals suggesting this could be the central bank's final hike or whether there could be more still to come.   Energy – Fed key for short term price direction Sentiment in the oil market has improved with ICE Brent settling a little more than 1% higher yesterday. The market is more optimistic following China’s Politburo meeting,  where there were promises for more support measures for the domestic economy. However, up until now, there haven't appeared to be any actual policies that have been announced. Overnight, the API also released US inventory numbers which showed that US crude oil inventories increased by 1.32MMbbls, whilst crude stocks at Cushing fell by 2.34MMbbls. On the product side, gasoline inventories fell by 1.04MMbbls, whilst distillate stocks increased by 1.61MMbbls. The report was a bit of a mixed bag, with little in the way of a strong takeaway from the numbers. The more widely followed EIA report will be out later today. The market will be watching closely the outcome of the FOMC meeting later today. Expectations are that the Federal Reserve will hike rates by 25bp, which could very well be the last hike in this cycle. However, any signal from the Fed that they have more to do will likely put some downward pressure on risk assets, including oil. The Saudis will be happy to see Brent trading back above US$80/bbl with their additional voluntary cut of 1MMbbls/d starting to have its desired effect. However, the broader OPEC+ cuts are leading to some distortions within the market (tightness in medium sour crudes) and this is evident in the unusual discount that Brent continues to trade at relative to Dubai. However, the decision that Saudi Arabia will need to make in the coming weeks is whether they will roll this additional cut into September or start to unwind it. The recent price strength might give the Saudis the confidence to start unwinding these cuts, but expectations will have to be managed and they will have to be careful how they go about it – too aggressively and it could put renewed pressure back on the market.

The Commodities Feed: Tight supplies lift oil prices OPEC oil output dropped by around 0.9MMbbls/d in July due to production cuts from Saudi Arabia and Nigeria. Meanwhile, the American Petroleum Institute (API) reported the biggest weekly drop in oil inventory in years.   Energy – OPEC crude output falls The oil market edged higher this morning with prices of both ICE Brent and NYMEX WTI gaining more than 1% day-on-day, following a bullish inventory report from the API and lower OPEC output in July. The API reported that US crude oil inventories decreased by 15.4MMbbls over the last week, significantly higher than the market expectations of around 1.4MMbbls. If confirmed by the Energy Information Administration's (EIA) report later today, this will be the largest weekly inventory drawdown since 1982. Cushing crude oil stocks are reported to have decreased by 1.8MMbbls. On the products side, API reported that gasoline and distillates inventories fell by 1.7MMbbls and 0.5MMbbls respectively, over the week ending 28 July. Meanwhile, preliminary OPEC production numbers for July are starting to come through and it is no surprise that the group reduced output over the month as some members agreed to implement voluntary production cuts. According to a Bloomberg survey, OPEC output declined by 0.9MMbbls/d month-on-month to 27.8MMbbls/d last month, the lowest since 2020. Saudi Arabia led the decline with its production falling by 810Mbbls/d to 9.15MMbbls/d followed by Nigeria trimming the output by 130Mbbls/d to 1.26MMbbls/d. Production in Libya also declined by 50Mbbls/d to 1.1MMbbls/d as a protest briefly disrupted production at its Sharara oil field. The output cuts were partially offset by recovering production in Iraq (+70Mbbls/d), Angola (+40Mbbls/d) and the UAE (+20Mbbls/d). On the products side, recent reports suggest that Petroleos Mexicanos shut down the nation’s largest oil-exporting terminal following an operational issue. Bloomberg reported that the FPSO Yúum K’ak’ Náab in the Gulf of Mexico was shut on Sunday because of a crude leak in one of its hose trains. Prior to this, Pemex halted its Salina Cruz terminal last month following a fire incident and unfavourable weather conditions. The export disruptions from Mexico could help increase demand for the US refined products in the domestic market in the short term.

The Commodities Feed: Russia-Ukraine tensions add to oil supply risks The Ukrainian drone attacks on Russian oil tankers in the Black Sea region have added to supply risks for the crude oil market. Meanwhile, the Joint Ministerial Monitoring Committee (JMMC) meeting of OPEC+ countries ended without any recommendation to change oil output levels for now.   Energy – Ukrainian drone attacks on Russian oil tankers ICE Brent settled above US$86/bbl on Friday as tensions in the Black Sea region increased further after Ukraine declared Russian ports in the Black Sea as ‘war risk’ areas and cautioned ships against using them. Ukrainian drones also attacked a Russian oil tanker over the weekend reflecting heightened tension within the region. The Black Sea route accounts for nearly 15-20% of the oil that Russia sells daily on global markets and is also a major transit corridor for Kazakh crude. In the recent JMMC meeting, the OPEC+ group noted its satisfaction regarding the compliance with the output levels by member countries and made no recommendation for any change in production strategy at this stage. The committee recognised the additional voluntary cuts from Saudi Arabia and Russia to balance the oil market. The group has changed the frequency of meetings from once a month to once every two months, with the next meeting scheduled for the first week of October. Saudi Arabia increased its official selling price for Asia and Europe for September deliveries following its decision to also extend the output cuts for the month. Saudi Aramco has increased the premium of Arab Light crude for Asian buyers by US$0.30/bbl to US$3.5/bbl for September deliveries. The increment was much steeper for European buyers with the new premium set at US$5.8/bbl compared to US$3.8/bbl for August deliveries. The premium for US buyers was left unchanged at US$7.25/bbl. The latest data from Baker Hughes shows that the US oil rig count declined by four for an eighth consecutive week to 525 over the last week. This is the lowest number of active rigs seen since 18 March 2022. The recent strength in oil prices should have seen higher capital expenditure and increasing rig count in the country, however, the oil exploration companies appear to still be assessing the stability of the current market strength. Lastly, the latest positioning data from CFTC show that speculators increased their net long position in NYMEX WTI for a fifth consecutive week by 13,855 lots over the last week, leaving them with net longs of 205,959 lots as of 1 August 2023, the highest since the week ending on 18 April 2023. Meanwhile, money managers increased their net longs in ICE Brent by 18,728 lots over the last week for a second consecutive week, leaving them with 215,368 lots as of last Tuesday.    

The Commodities Feed: Disappointing China trade data weighs on sentiment Trade data from China was broadly on the soft side for July, reflecting a demandslowdown for commodities. China’s crude oil, copper and iron ore imports softened as economic and industrial activity slowed. Imports of soybeans remain firm on much higher 'crushing' demand.   Energy: China's crude oil imports slow ICE Brent slipped from highs yesterday and has been trading weak in the morning session today as the focus shifts back to demand-side scenarios. The latest trade data from China shows that crude oil imports in the country fell 19% MoM to 43.7mt (10.3MMbbls/d) in July on lower domestic demand amid higher inventories. That said, oil imports are still 17% higher compared to last year’s low base when the nation was struggling with the Covid outbreaks and extensive lockdowns. China’s crude imports have increased by 12.5% YoY to 326mt for the first seven months of the year. For refined products, fuel exports from the country increased 56% YoY to 5.3mt in July 2023, as China tries to compensate for weaker domestic consumption, particularly industrial demand for diesel. YTD exports of refined products have increased 46% YoY to 36.6mt over the first seven months of the year. Concerns over supply constraints on Russian refined products might continue to support demand for Chinese fuel products in the near term.

The Commodities Feed: Disappointing China trade data weighs on sentiment Trade data from China was broadly on the soft side for July, reflecting a demandslowdown for commodities. China’s crude oil, copper and iron ore imports softened as economic and industrial activity slowed. Imports of soybeans remain firm on much higher 'crushing' demand.   Energy: China's crude oil imports slow ICE Brent slipped from highs yesterday and has been trading weak in the morning session today as the focus shifts back to demand-side scenarios. The latest trade data from China shows that crude oil imports in the country fell 19% MoM to 43.7mt (10.3MMbbls/d) in July on lower domestic demand amid higher inventories. That said, oil imports are still 17% higher compared to last year’s low base when the nation was struggling with the Covid outbreaks and extensive lockdowns. China’s crude imports have increased by 12.5% YoY to 326mt for the first seven months of the year. For refined products, fuel exports from the country increased 56% YoY to 5.3mt in July 2023, as China tries to compensate for weaker domestic consumption, particularly industrial demand for diesel. YTD exports of refined products have increased 46% YoY to 36.6mt over the first seven months of the year. Concerns over supply constraints on Russian refined products might continue to support demand for Chinese fuel products in the near term.

The Commodities Feed: LNG strike action looms We should get more clarity on potential strike action at Australian LNG facilities later this week, with workers giving a deadline for talks. Gold prices remain under pressure, but Jackson Hole could bring increased volatility later in the week.   Energy - Moving closer to LNG strike action The global natural gas market should get more clarity around potential strike action at Australian LNG facilities this week. Over the weekend, workers at Woodside said they will give the company until the end of Wednesday to come to a deal - otherwise they will call industrial action. Workers said that they would give 7 working days notice if strike action is to be taken. Woodside’s North West Shelf (NWS) facilities have a capacity of around 16.7mtpa, equivalent to a little over 4% of global supply. We should also get more clarity on what workers at Chevron’s Gorgon and Wheatstone facilities decide by 24 August. These two facilities have a combined capacity of 24.5mtpa. Given that European gas storage is now around 91% full, we believe any strength in prices should be short-lived. We would need to see a large amount of the at-risk capacity (41.2mtpa) offline for a prolonged period in order to lead to a significant change in European fundamentals, at least over the next month or two. Chinese trade data released last week shows that LNG imports in July totalled 5.86mt, down from 5.96mt the previous month, although, still up 24.3% YoY. This leaves cumulative LNG imports at 39.24mt, up 9.3% YoY. These stronger YoY flows are to be expected, given the impact of covid-related lockdowns last year. It is important to point out that cumulative imports are still down more than 13% from 2021 levels.   Trade data also showed that Chinese diesel exports grew significantly, with 910kt exported over July, up from 290kt in June and a 153% increase YoY. This leaves cumulative exports at 8.4mt - an almost 250% increase YoY. Stronger run rates and larger export quotas have supported these stronger flows, whilst a strong global middle distillate market more recently will also be supportive of these flows. The latest rig data from Baker Hughes shows that the number of active oil rigs in the US fell by 5 over the week to 520 - the lowest level since March last year. The US has lost 107 oil rigs since early December and it is not too surprising that this reduced drilling activity means that oil production growth forecasts for later this year and through 2024 are looking relatively modest. Primary Vision’s frac spread count shows that it is not just drilling activity which is falling - US completion activity is also trending lower, with the frac spread count falling by 6 over the last week to 256. The latest positioning data shows that speculators increased their net long in ICE Brent by 19,748 lots to 230,735 lots. This is despite oil prices edging lower over the reporting period. The move was driven by fresh longs, suggesting that some speculators took advantage of more recent price weakness to enter the market from the long side. Positioning data for NYMEX WTI shows that speculators liquidated longs over the week, with the net long declining by 31,338 lots to 178,820 lots. Finally, speculators remain constructive towards middle distillates, increasing their net long in ICE gasoil by 5,703 lots to 93,941 lots - the largest position since March 2022. The market appears to be concerned about the fact that ARA gasoil inventories are still looking quite tight and we are yet to start seeing a build in inventories as we edge closer towards the start of winter.

The Commodities Feed: Australian LNG strike risks ease We are likely to see further downward pressure in natural gas prices today with Woodside and unions reaching an in-principal agreement. This means that strike action may be avoided at the North West Shelf. Unions will meet today to discuss Woodside’s ‘strong’ offer.   Energy - Unions reach in-principle agreement European natural gas prices came under pressure yesterday. TTF prices settled more than 14% lower on the day as the market awaited news on the outcome of talks between Woodside and unions. This morning, both Woodside and unions have said that they have reached an in-principle agreement. The Offshore Alliance will meet today in order to discuss Woodside’s offer, an offer which they have said is ‘strong'. Obviously, we will need to see what the unions finally decide at their meeting today, but all indications at the moment look promising that strike action at the North West Shelf will be avoided. This suggests that we could see a further sell-off in European gas and Asian LNG prices today. However, even if a deal is made with Woodside, talks with Chevron are still ongoing, where there is 24.5mtpa of capacity at risk. The oil market saw some further weakness yesterday. There has been increased noise in recent days about possible supply increases from Iran and Iraq. We can now also add Venezuela to the list, with reports that the US administration is in talks with Venezuela about easing sanctions in return for fairer elections next year. EIA data released yesterday show that US commercial crude oil inventories fell by 6.13MMbbls last week, to leave total crude oil inventories at less than 434MMbbls - the lowest level this year. Crude oil stocks at Cushing also fell by 3.13MMbbls over the week. Meanwhile, refined product numbers were less constructive with gasoline and distillate inventories increasing by 1.47MMbbls and 945Mbbls respectively. Total product supplied (implied demand) was also weaker over the period, falling 498Mbbls/d WoW.

The Commodities Feed: Russia to extend oil export curbs Crude oil prices have been trading firm this morning after Russia confirmed that it will extend export curbs, although the details are still not available. US natural gas inventory continue to increase at a strong pace providing some comfort to the market on natural gas supplies, even as uncertainty about Australian LNG continues.   Energy – Russian oil export cuts to continue ICE Brent prices traded firm yesterday and continued the gains this morning after Russia announced an extension of export curbs. Russia’s Deputy Prime Minister Alexander Novak said in a televised meeting that the country has agreed to extend the export curbs, although the details haven’t been provided yet. Russia made a voluntary cut to its oil exports of around 500Mbbls/d for August and 300Mbbls/d for September. Saudi is also likely to extend the voluntary production cuts of around 1MMbbls/d for October as demand concerns remain. China has issued an export quota of around 12m tonnes for clean refined products including gasoline, jet fuel and diesel in its third quota release for the year. China has so far issued an export quota of around 40m tonnes for clean products in 2023 compared to around 37.25m tonnes of export quota allocated for the full year 2022. Slow domestic demand and a ramp-up in refining capacity have been creating a surplus of products in the Chinese market and a higher quota is aimed at reducing this surplus. Finally, the Energy Information Administration in the US reported that natural gas inventory in the country increased by 32Bcf over the last week taking total inventory to 3,115Bcf as of 25 August. US inventory of natural gas is higher by around 484Bcf compared to year-ago levels and around 249Bcf higher than the five-year average for this point in the season. Higher gas stocks in the US and Europe provide some comfort to the gas market when a short-term supply disruption from Australia cannot be ruled out. The uncertainty over the Australian gas supply from two LNG plants (Gorgon and Wheatstone) continues, with workers rejecting the latest pay package from the company with negotiations set to resume. Without an agreement in place, workers could initiate industrial action from 7 September.

The Commodities Feed: Growing oil deficit The oil market rallied yesterday on the back of a constructive OPEC report. Today, all attention will be on the IEA’s monthly oil report and whether the agency shares the same view as OPEC.   Energy - OPEC sees large deficit The oil market continued its move higher yesterday. ICE Brent rallied by almost 1.6% taking it above US$92/bbl and trading to its highest level since November last year. The catalyst for the move was a bullish monthly report from OPEC. The group’s numbers suggest that the oil market could see a deficit of more than 3MMbbls/d over the fourth quarter of this year. These numbers will cause some to question OPEC’s claims that their main objective is to keep the market balanced as their own numbers clearly do not show this. However, the actual balance could end up looking very different, given that there is still plenty of uncertainty over demand. In addition, we have seen Iranian and Venezuelan output edging higher this year and there is the potential for at least Iranian supply to continue rising despite US sanctions. Higher prices are likely to lead to increased political pressure, particularly given that there are elections in a number of countries next year, including key oil consumers, the US and India. It may be difficult for the US government to allow further releases from its strategic petroleum reserves (SPR), but we are likely to see the government taking a pause in refilling the SPR after the large releases seen last year. In addition to this, the US is likely to be less strict in enforcing sanctions against Iran. Already, in recent months this appears to be the case. The EIA released its latest Short-Term Energy Outlook yesterday in which they slightly revised higher their US crude oil production estimates. The EIA expects US output to grow by around 880Mbbls/d YoY to a record 12.78MMbbls/d this year, while for 2024, supply is expected to grow by a more modest 370Mbbls/d to 13.16MMbbls/d. However, given the slowdown that we have seen in drilling activity for much of this year, it might be a challenge to hit these estimates. Overnight, the API released US inventory numbers, which were more bearish. US crude oil inventories increased by 1.17MMbbls over the week, whilst gasoline and distillate stocks increased by 4.2MMbbls and 2.59MMbbls respectively. Today, the IEA will release its latest monthly oil market report. The market will be eager to see their latest forecasts, particularly after OPEC's numbers. This release will be followed by the EIA’s usual US inventory numbers.

The Commodities Feed: European gas rallies European natural gas prices saw significant strength yesterday as we move closer towards the official start of the heating season, whilst there have also been further disruptions to Norwegian gas flows.   Energy – European gas rallies European natural gas prices saw further strength yesterday with TTF rallying by 11.69% to settle at a little over EUR44/MWh, its highest level since April. Further disruptions to Norwegian supply appear to have provided a boost, with the Troll field seeing a delayed startup after a compressor test. The outage is affecting about 25mcm/day of capacity. This is happening at a time when there is also a planned outage at the Skarv field, impacting a little over 22mcm/day of capacity. However, fundamentals in the short term remain comfortable, with European gas storage 95% full as we head closer to the start of the new gas year, which officially gets underway on 1 October.

Crude oil futures in London and New York continue to attract buying interest as the available supply, especially of diesel-rich crude oil from the Middle East and Russia remain tight as producers keep output well below their respective production ability. The current tightness is increasingly being expressed at the front end of the curve, where the premium for near-term barrels of WTI trades compared to the next month has almost reached 2 dollars a barrel, the highest level in more than a year. However, while the short-term outlook points to higher tight supply-driven crude prices, the recent bear steepening move in the US yield curve signals an incoming economic slowdown and with that an increase risk to growth and demand next year.   Crude oil futures in London and New York continue to attract buying interest as the available supply, especially of diesel-rich crude oil from the Middle East and Russia remain tight as producers keep output well below their respective production ability. Not least Saudi Arabia who despite OPEC’s own projection for the tightest market in more than a decade this coming quarter decided to extend its unilateral one million barrels a day production cut until yearend.  That decision along with cuts from others, including Russia, helped drive up the cost of energy, thereby supporting the risk of sticky inflation, and together with a still resilient US economy and strong labor market they recently led the US Federal Reserve to deliver a hawkish pause in their aggressive rate hike campaign, while at the same time indicating that rates may have to stay higher for longer. A signal which helped send US 10-year Treasury yields to a 16-year high while the dollar reached a year-high against a basket of major currencies.      In WTI, the mini correction that followed the recent rejection at $93.75, the double top from October and November last year, seems to have stopped before challenging the first level of support at $87.60, the 38.2% retracement of the latest run up in prices as well as the 21-day moving average. It highlights the current market strength being supported by tight market conditions. A break above $93.75 would bring $97.65 into focus while supporting a fresh attempt by Brent to reach the important $100 per barrel mark. Source: Saxo.   Looking ahead, there is little doubt that until a decision to raise production is made, the global energy market will remain tight, and during this time the risk of a major correction still is relatively low, something that is being reflected in the current positions held by hedge funds and CTA’s, more on that later. However, at the same time the US yield curve is increasingly sending a signal of distress, as recession risks continue to gather momentum, not only in the US but also in Europe where German economic institutes forecast a 0.6% GDP contraction already this year.      What do recent movements in the US yield curve signal? There has been a lot of talk recently about the US yield and the so-called bear-steepening move, and what it signals. Since early July, the US 2-10 yield curve spread has steepened, halving from around -110 basis points to the current -55 basis points. The latest steepening has been driven by a faster increase in the 10-year yield while the 2-year yield held steady amid doubts about how much higher the FOMC will be able to raise rates without damaging the economy.  Bear steepening does not only raise red flags for stock market investors but also the wider economy. Rising long-dated yields has a large and rapid tightening effect on the real economy given the impact on private mortgage rates and corporate borrowing rates. In a situation where the economy is running hot, rising interest rates pose limited risks as rising yields are a normal reaction to robust growth. However, in the current situation where sticky inflation drives long-end yields higher it may pose a threat as the economic outlook looks increasingly challenged and could deteriorate faster. Back to the oil market where the current tightness is increasingly being expressed at the front end of the curve, where the premium for near-term barrels of WTI trades compared to the next month has almost reached 2 dollars a barrel, the highest level in more than a year. Looking further out the curve we find the 12-month spread between December 2023 and December 2024 has jumped to more than 11 dollars a barrel from around 2 dollars back in July. The chart below shows the rising backwardation - higher prices now followed by lower prices later – and the mentioned bear steepening of the US yield curve.  It's often said the oil curve never lies, and it is currently telling us that prices will remain high in the short term before recession risks begin to weigh on demand into 2024. A situation, if realized, that may force OPEC to accept lower prices or forcing an extended period of production cuts.      Speculators onboard the bull train but with some hesitation The latest Commitment of Traders report covering the week to September 19 showed continued belief in higher crude oil prices with hedge funds adding to their long positions in WTI and Brent Crude oil futures. Since June 30 when the latest round of production cuts began to bite, the combined net long in Brent and WTI has risen by 329k contracts (329 million barrels) to 560k contracts. However, looking at how the change has occurred,we find the increase being driven by 171k contracts of fresh longs and a 158k contract reduction in the gross short, and while the WTI long has reached a February 2022 high, the Brent long has not even returned to the March 2023 high. Funds are buying Brent and especially WTI futures, but not at a pace that could be expected given the recent strength and momentum, potentially signaling a battle between current tight fundamental and macroeconomic headwinds pointing to lower prices later. In addition, with almost half of the increase in the net long being driven by short covering, the gross short has collapsed to a 12-year low at just 46k contracts, and while a very small gross short attracts little attention while prices are rising, it will pose a challenge once the technical and/or fundamental outlook turns negative. At that point, a sizable number of longs might be forced to chase a small pool of short positions willing to buy and it may lead to expanded daily trading ranges.        

The Commodities Feed: Lingering supply risks The oil market started the week on a weak footing. However, geopolitical risks remain elevated and the short-term outlook remains dependent on developments in the Middle East.   Energy - supply risks remain The oil market came under significant pressure yesterday with ICE Brent settling 3.35% lower on the day, while WTI traded down to its lowest level since the Israel-Hamas conflict. This is despite the fact that there are clear upside risks still facing the market in the current geopolitical environment. Disruptions to Iranian oil flows remain the most obvious risk to the market, which could see anywhere between 500k b/d and 1m b/d of supply lost if the US were to strictly enforce sanctions once again. Up until now, developments in the Middle East have yet to impact oil supply. In the absence of supply disruptions from the region, it is difficult to see a significant and sustained upside in prices. Also important for the market are developments in Venezuela. Recently, the US decided to ease sanctions against Venezuela in return for the promise of fairer elections in 2024. The expectation was that the lifting of these sanctions could see Venezuela increase its oil supply in the region of 200k b/d. However, overnight, the supreme court in Venezuela suspended the results of the opposition’s primary elections, which will likely call into question whether the sanctions relief provided to Venezuela will remain in place.   On the calendar for today, December Brent futures expire and the API will also release weekly US inventory data. In addition, markets will await China’s official PMI data which will be released this morning. Expectations are for the manufacturing PMI to come in at 50.2 for October, unchanged from the previous month. A second consecutive reading in expansion territory will likely go down well with markets, showing some further signs of firming by the Chinese economy.

The Commodities Feed: Central banks increase gold reserves The latest data from the World Gold Council shows that central banks purchased around 800 tonnes of gold over the first three quarters of 2023 as geopolitical uncertainty pushed them to diversify more towards safety assets. The trend is likely to continue in the fourth quarter amid tensions in the Middle East.   Energy – US oil inventory increased over last week The crude oil front-month contract has been trading soft at around US$85.7/bbl this morning as the risk premium continues to soften in the absence of any immediate danger to the oil supply from the Middle East. Oil supply remains healthy with a Reuters survey reporting that OPEC oil production increased by another 180Mbbls/d in October compared to September with higher production coming from Nigeria, Angola, Iraq and Iran. Having said that, the risk of an escalation in the Middle East cannot be ruled out and the market remains cautious on that front. Weekly inventory data from the API shows that the US crude oil inventories increased by 1.35MMbbls over the last week; lower than the average market expectations of around 1.6MMbbls. Cushing crude oil stocks are reported to have increased by 375Mbbls. On the products side, API reported that gasoline and distillates inventories fell by 357Mbbls and 2.48MMbbls respectively, over the week ending 27 October. The more widely followed Energy Information Administration (EIA) report will be released later today. India’s crude oil imports dropped to a YTD low of 17.4mt in September 2023 as firm prices and refinery maintenance weighed on crude oil demand. However, some reports suggest that imports may have recovered in October as refineries increased operating rates whilst some of the state refiners also increased imports to meet annual purchase obligations under the term deal. The European gas market traded softer yesterday following the expectations of the arrival of the Ciaran storm over the coming days, which could bring down electricity demand due to infrastructure damages. Meanwhile, gas storage is running nearly full in Europe (99.3% of the capacity as of 30 October) as unusually mild temperatures have reduced the overall heating consumption in the nation.

In the FX  The US dollar jumped to its 50-DMA as a response to a rapid surge in the US Treasury yields. The EURUSD sank below the 1.07 level. From a technical perspective, the early week rally remained capped below a major Fibonacci level, the 38.2% retracement on summer to October selloff near the 1.0760. The EURUSD remains in a bearish trend after the failure to clear an important technical resistance. Unideal political news from Spain and Portugal, and a morose economic outlook for the Eurozone will likely keep the euro in retreat against the US dollar. Even though the European Central Bank (ECB) officials cry out loud that the rates will stay high for long in the Eurozone as well, it sounds much less credible when economic data doesn't give sufficient support.   In the UK, the Bank of England (BoE) wants to look tough and convince investors that it's too early to talk about rate cuts. But Cable's latest surge remained capped below the 200-DMA, and the pair is back to 1.22. The medium-term outlook for Cable remains neutral to bearish. Another surge in the dollar appetite will easily send the pair to 1.20 psychological level.   The dollar-yen is back to misery, above 151. Traders want to buy the USDJPY, but they also know that the Japanese authorities are tempted to intervene to prevent the Japanese yen from getting shattered just because the Bank of Japan (BoJ) can't keep up with the rest of the major global central bank policies. Japanese are happy to see inflation emerge after decades of deflation. Perhaps, the view of China – and Chinese deflation – doesn't make them want to move any faster.  In energy, the oil bulls come in timidly near the $75pb psychological support. The oil selloff probably went too far and it's time for – at least – a minor positive correction. A move toward the $78/80 range would be reasonable. This area includes the 200-DMA and the minor 23.6% Fibonacci retracement on September to November selloff.   Today is Friday. Fears of escalating geopolitical tensions could help strengthen the $75 support in US crude. But regarding that topic, the biggest fear of oil traders in Gaza was the implication of Iran in the war, which would then lead to another embargo on the Iranian oil, decrease the global supply and send prices higher. Now, the new market narrative is that, even if the Iranian oil gets banned, it doesn't matter because first, the Iranian shipments have been falling due to weaker Asian demand and two, 90% of the Iranian shipments go to China anyway, and China doesn't care about the Iranian oil ban, they will continue buying it. And oh, there is also the fact that the US shale production hit a record high of 13.2mbpd. Together with the rising worries of slower global demand, the above-stated factors should ensure that a potential rebound in oil prices doesn't extend easily above the $78/80 range.   

The Commodities Feed: OPEC+ meeting delayed Oil prices came under pressure yesterday as this weekend’s scheduled OPEC+ meeting has been delayed. Disagreement between members leaves uncertainty over the group’s output policy for 2024.   Energy - OPEC+ meeting delayed Disagreement has returned to the OPEC+ alliance, which has seen the group’s scheduled meeting to discuss 2024 output policy delayed. Unsurprisingly, this news weighed heavily on the market - Brent was down as much as 4.9% at one stage yesterday. However, the market managed to claw back some of these losses to settle just 0.59% lower on the day. OPEC+ was scheduled to meet on 26 November. However, the meeting has been pushed back to 30 November. Several members are reportedly unhappy about their production targets for next year, levels which were announced back in June. This is specifically the case for Angola, Congo and Nigeria, who had their production targets cut since they struggled to hit their 2023 targets. These members were unhappy back then, and it was agreed that their targets would be revisited before the end of this year and possibly revised higher. Clearly, this has not happened. Angola’s output target was cut from 1.46MMbbls/d in 2023 to 1.28MMbbls/d in 2024, Congo’s target was reduced from 310Mbbls/d to 276Mbbls/d, whilst Nigeria’s target was cut from 1.74MMbbls/d to 1.38MMbbls/d. While Angola and Congo are currently producing below their 2024 production targets, Nigeria has managed to increase output recently and is pumping around 1.49MMbbls/d - above its target for next year. Disagreement between members will likely increase volatility within the market over the course of the next week. It is unclear how this will affect broader policy, or whether it could have any impact on Saudi Arabia extending its additional voluntary cut of 1MMbbls/d into early 2024. The EIA’s weekly inventory report was fairly bearish with US crude oil inventories growing by 8.7MMbbls over the week. This leaves total US commercial crude oil inventories at a little over 448MMbbls - the highest level since July. Despite refinery utilisation remaining below average levels for this time of year (following a fairly heavy maintenance season), gasoline stocks still increased by a marginal 750Mbbls. However, the distillate market continues to tighten. Distillate fuel oil inventories fell by a little over 1MMbbls, which leaves stocks at a little under 106MMbbls- the lowest since May 2022 and at the lowest level in at least 20 years for this time of year. We continue to believe that middle distillates will remain well supported.

On a slippery floor By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   While the US economy has been surprisingly resilient this year to the Federal Reserve's (Fed) aggressive monetary tightening, we cannot say that we have a similar soothing picture in Europe. The energy crisis, that followed the pandemic, has been hard on Germany. The country needs money when money becomes rare and expensive. Germany decided to suspend the debt limit for the 4th consecutive year – signaling that borrowing in Europe will continue to increase, and the new debt that the Europeans will take on their shoulders will cost significantly higher than a few years ago.   German bonds fell yesterday on news of yet another suspension of the debt limit. The 10-year German yield advanced to 2.60%, Italy's 10-year yield jumped to 4.40%, the Italian – German yield spread rebounded this week from the lowest levels since September, and the widening yield spread between core and periphery could become a limiting factor for euro appetite at a time traders should decide whether the EURUSD should appreciate above the 1.10 psychological mark.   As per the European Central Bank (ECB) expectations, the European officials do their best to tame the rate cut expectations in the Eurozone. Belgian central bank governor Pierre Wunsch said yesterday that the ECB won't cut the rates as long as wages growth remains elevated, while the German central bank head Joachim Nagel said that cutting rates too early would be a mistake. A mistake? Maybe. Yet, economic data comes as further evidence that the European economies are not going toward sunny days. Released yesterday, the European PMI figures came in slightly better than expected, but the reading was below 50 for the 6th consecutive month, meaning that activity in the Eurozone contracted for the 6th consecutive month. The Eurozone GDP fell below 0 at the latest reading, while in comparison, the US GDP grew nearly 5%. This is to say that, based on the current data, the Fed has a greater margin for keeping rates steady than their European counterparts. It at least has better credibility. And the Fed's bigger hawkish margin compared to the ECB should keep the euro appetite limited against the US dollar following the rally since the beginning of October.   In the US, despite warnings that the falling US long-term yields will, at some point, trigger a hawkish reaction from the Fed and eventually reverse, the Fed doves remain in charge of the market. The US dollar index struggles to gain traction above the 200-DMA.   The USDJPY remains offered near the 50-DMA after the Japanese inflation advanced to a 3-month high in October (rose to 3.3% level from 3% printed a month earlier). Normally, it would've boosted bets of Bank of Japan (BoJ) normalization, but the BoJ should first awaken from its coma.  In energy, US crude trades near $75/76 region. Downside risks prevail due to speculation that the delayed OPEC meeting could result in Saudi Arabia not doubling its solo production cuts. There is even a slim possibility that they eventually reverse them.   I am wondering if this week's drama is not staged amid poor buying following the news that Saudi would doble its cuts, to cast shadow in Saudi's intention to defend oil prices, to bring attention to OPEC and to Saudi which finally would go ahead and double its production cuts hoping that the market reaction would be stronger than if they had announced the same outcome this weekend. In all cases, deteriorating growth prospects will likely limit the upside potential in oil prices in the medium run. The short run will certainly see more volatility.    

The Commodities Feed: Oil demand risks linger Weak Chinese oil import data has added fresh con cerns for the oil market. The EIA report also failed to provide support as a significant rise in the refined product inventories clouded the expectations for a seasonal demand pickup. Energy – China's crude oil imports drop The weakness in the oil market persists, with ICE Brent settling down by around 4% yesterday to below US$75/bbl; ICE Brent has dropped by nearly 10% since the OPEC+ meeting. Weaker demand data from China has further weighed on the sentiment in the short term. The latest trade data from China shows that crude oil imports in the country dropped 9.2% YoY (first annual decline since April) to 42.4mt (10.3MMbbls/d) in November on slowing demand from refineries, weak economic indicators, and higher inventories. Comparatively, China imported around 49mt of crude oil in October 2023, showing a big fall in demand for the fuel. Cumulatively, China’s crude imports have increased by 12% YoY to 515.6mt for the first eleven months of the year, although most of it could be attributed to high imports in the 2nd and 3rd quarters of the year. The EIA’s weekly US inventory report was fairly mixed yesterday. US commercial crude oil inventories fell by 4.6MMbbls over the last week as the refineries increase their capacity usage during fall maintenance. Earlier, API reported an inventory withdrawal of 0.6MMbbls while the market expected withdrawals of around 0.8MMbbls. Total crude oil inventories (excluding SPR) now stand at 445Mbbls and are about 1% below the five-year average. Meanwhile, oil inventories at Cushing, Oklahoma fell by 1.83MMbbls to 29.6MMbbls. The EIA said that the US crude oil production fell by 0.1Mbbls/d to 13.1MMbbls/d last week. As for refined product inventories, gasoline inventories rose by 5.4MMbbls, against a forecast for a buildup of 1.2MMbbls. Distillate stockpiles increased by 1.3Mbbls last week, higher than the expectations for a buildup of 1.1MMbbls. Meanwhile, refineries operated at 90.5% of their capacity, up 0.7% from the previous week, but 5% lower than the same period last year.  

The Commodities Feed: Sentiment improves The dovish comments from the Federal Reserve helped to improve sentiment yesterday, with gold prices recovering back to around US$2,030/Oz. Crude oil prices also gained on OPEC and EIA reports, although demand concerns continue to linger.   Energy – OPEC expects a tighter oil market The oil market recovered moderately yesterday as positive sentiment in the broader financial market pushed up oil prices as well. The monthly report from OPEC was constructive, with estimates of a huge deficit for the current quarter and next quarter. However, the market remains cautious as economic concerns continue to cloud demand prospects.   In its latest Monthly Oil Market Report, OPEC estimated a tighter crude oil market for the fourth quarter of this year and 2024 as supply falls short of market demand if announced OPEC+ cuts are maintained. The OPEC revised down its non-OPEC crude oil production estimates by around 190Mbbls/d for the fourth quarter on lower output in the US and Asia. The requirement for OPEC crude is estimated at around 31.1MMbbls/d for the fourth quarter compared to around 27.9MMbbls/d of production in the quarter so far. For 2024, the organisation expects the requirement for OPEC crude to increase by around 0.8MMbbls/d to 29.9MMbbls/d.   Meanwhile, OPEC also reported that crude oil production by member countries dropped marginally by 57Mbbls/d in November to 27.8MMbbls/d. Iraq and Angola reported major production losses of 77Mbbls/d and 37Mbbls/d respectively whilst Venezuela, Libya and Kuwait increased supplies at a moderate pace. OPEC production has largely been flat at around 27.8-27.9MMbbls/d for the last three months. The weekly report from the EIA has also been positive for the oil market yesterday, with crude oil inventory in the US falling by 4.3MMbbls over the last week against market expectations of around 1.5MMbbls of inventory withdrawal. Crude oil input to refineries increased by 0.2MMbbls/d to around 16MMbbs/d that have helped to increase demand for crude oil. Exports of crude oil remain constrained, largely due to congestion in the Panama Canal, with net imports increasing by 0.3MMbbls/d to 2.2MMbbls/d. Among refined products, gasoline inventory increased by 0.4MMbbls to 224MMbbls while distillate inventory also increased by 1.5MMbbls to 113.5MMbbls.

Notes from a slow year-end morning By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  The last PCE print for the US was perfect. Core PCE, the Federal Reserve's (Fed) favourite gauge of inflation, printed 0.1% advance on a monthly basis – it was softer than expected, core PCE fell to 3.2% on a yearly basis – it was also softer than expected, and core PCE fell to 1.9% on a 6-month basis, and that's below the Fed's 2% inflation target.   Normally, you wouldn't necessarily cheer a slowdown in 6-month inflation but because investors are increasingly impatient to see the Fed cut its interest rates, all metrics are good to justify the end of the Fed's policy tightening campaign. So here we are, cheering the fact that the 6-month core PCE fell below the Fed's 2% target in November. The US 2-year yield is preparing to test the 4.30% to the downside, the 10-year yield makes itself comfy below the 4% mark – and even the 3.90% this morning, and the stocks joyfully extend their rally. The S&P500 closed last week a few points below a ytd high, Nasdaq100 and Dow Jones consolidated near ATH levels and the US dollar looks miserable. The dollar index is at the lowest level since summer and about to step into the February to August bearish trend.   There is not much data left to go before this year ends. We have a light economic calendar for the week, and the trading volumes will be thin due to the end-end holiday.   Morning notes from a slow morning  Major central banks reined in on inflation in 2023 – the inflation numbers are surprisingly, and significantly lower than the expectations. Remember, we though – at the start of the year - that the end of China's zero-Covid measures was the biggest risk to inflation. Well, we simply have been served the exact opposite: China's inability to rebound, and inability to generate inflation simply helped getting the rest of us out of inflation. China did not contribute to inflation but to disinflation instead.  The Fed sounds significantly more dovish than its European peers – even though inflation in Europe and Britain have come significantly down, and their sputtering economies would justify softer monetary policies, whereas the US economy remains uncomfortably strong. Released last Friday, the US durables goods orders jumped 5.4% in November! The diverging speed between the US and the European economies makes the policy divergence between the dovish Fed and the hawkish European central banks look suspicious. Yes, the EURUSD will certainly end this year above that 1.10 mark, nonetheless, the upside potential will likely remain limited.   Elsewhere, everyone I talk to is short USDJPY, or short EURJPY, or GBPJPY. But the bullish sentiment in the yen makes the yen stronger and a stronger yen will help inflation ease in Japan, and slow inflation will allow the Bank of Japan (BoJ) to remain relaxed about normalizing policy. And indeed, released this morning, the BoJ core inflation fell more than expected to 2.7%. Bingo! Therefore, it looks like the USDJPY's downside potential may be coming to a point of exhaustion near the 140 – in the absence of fresh news.   In energy, oil is having such a hard time this year. The barrel of American crude couldn't break the $74pb resistance and there is now a death cross formation on a daily chart. Yet the oil bulls have all the reasons on earth to push this rally further: the tensions in Suez Canal are mounting, the war in the Middle East gets uglier, Iran looks increasingly involved in the conflict, OPEC restricts production, and central banks are preparing to cut rates. But interestingly, none has been enough to strengthen the back of the bulls. Failure to clear the $74/75 resistance will eventually weaken the trend and send the price of a barrel below $70pb. If that's the case, there will be even more reason to be confident about a series of rate cuts next year.  

The Finish Line By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Here we are, on the last trading day of the year. This year was completely different than what was expected. We were expecting the US to enter recession, but the US printed around 5% growth in the Q3. We were expecting the Chinese post-Covid reopening to boost the Chinese growth and fuel global inflation, but a year after the end of China's zero-Covid measures, China is suffocating due to an unexpected deflation and worsening property crisis. We were expecting last year's negative correlation between stocks and bonds to reverse – as recession would boost bond appetite but batter stocks. None happened.  The biggest takeaway of this year is the birth of ChatGPT which propelled AI right into the middle of our lives. Nasdaq 100 stocks close the year at an ATH, Nvidia – which was the biggest winner of this year's AI rally dwarfed everything that compared to it. Nvidia shares gained more than 350% this year. That's more than twice the performance of Bitcoin – which also had a good year mind you.   Besides Nvidia, ChatGPT's sugar daddy Microsoft, Apple, Amazon, Meta, Google and Tesla – the so-called Magnificent 7 generated almost all of the S&P500 and Nasdaq100's returns this year. And thanks to this few handfuls of stocks, Nasdaq100 is set for its best year since 1999 following a $7 trillion surge.   The million-dollar question is what will happen next year. Of course, we don't know, nobody knows, and our crystal balls completely missed the AI rally that marked 2023, yet the general expectation is a cool down in the technology rally, and a rebalancing between the big tech stocks and the S&P493 on narrowing profit lead for the Magnificent 7 compared to the rest of the index in 2024. T  The other thing is, the S&P500's direction next year is unclear as the Federal Reserve (Fed) is expected to start chopping the interest rates, with the first rate cut expected to happen as early as much with more than 85% probability. So what will the Fed cuts mean for the S&P500? Looking at what happened in the past, the S&P500 typically rises after the first rate cut, but the sustainability of the gains will depend on the underlying economic fundamentals. Lower rates are good for the S&P500 valuations EXCEPT when the economy enters recession within the next 12-months. So that backs the idea that I have been trying to convey here since weeks: lower US yields will be supportive of the S&P500 valuations as long as the economy remains strong, and earnings expectations hold up.    For now, they do. The S&P500 earnings will certainly end a bit better than flat this year, and the EPS is expected to rise by more than 10% next year. The Magnificent 7 are expected to post around 22% EPS growth next year. But note that, these expectations are mostly priced in, so yes, there will still be a hangover and a correction period after a relentless two-month rally triggered a broad-based risk euphoria among investors. The S&P500 is about to print its 9th consecutive week of gains – which would be its longest winning streak in 20 years.  In the FX, the US dollar index rebounded yesterday as treasury yields rose following a weak sale of 7-year notes. But the US dollar is still set for its worse year since 2020. Gold prepares to close the year near ATH, the EURUSD will likely reach the finish line above 1.10 and the USDJPY having tested but haven't been able to clear the 140 support. In the coming weeks, I would expect the EURUSD to ease on rising expectations from the ECB doves, and/or on the back of a retreat from the Fed doves. We could see a minor rebound in the USDJPY if the Japanese manage to calm down the BoJ hawks' ambitions. Overall, I wouldn't be surprised to see the US dollar recover against most majors in the first weeks of next year.  In the energy, crude oil remains downbeat. The barrel of American crude couldn't extend rally after breaking the $75pb earlier this week, and that failure to add on to the gains is now bringing the oil bears back to the market. The barrel of US crude sank below the $72pb as the US oil inventories slumped by more than 7mio barrels last week, much more than a 2-mio-barrel decline expected. The latter brought forward the demand concerns and washed out the supply worries due to the Red Sea tensions. Note that crude oil is set for its biggest yearly decline since 2020; OPEC's efforts to curb production and the rising geopolitical tensions in the Middle East remained surprisingly inefficient to boost appetite in oil this year.