fundamentals

OPEC+ meeting brings deeper Saudi cuts It hasn't been an easy OPEC+ meeting for members. The group failed to come to an agreement on deeper cuts, but production targets have been set for 2024 and voluntary cuts were extended. The Saudis have also decided to make further voluntary cuts.     What was agreed? The OPEC+ meeting was eventful. Heading into the meeting the expectation was that the group would announce further supply cuts – which was easier said than done. As Saudi Arabia struggled to convince other members to make deeper cuts, the group instead agreed to put in place a production target of 40.46MMbbls/d for 2024. This is lower than the 41.86MMbbls/d production target set back in October last year, which runs from November 2022 to December 2023. In addition to setting production targets for next year, members who announced voluntary supply cuts amounting to 1.66MMbbls/d back in April made the decision to extend them through to the end of 2024. The action taken by OPEC+ does little to help solve immediate concerns over demand. As a result, Saudi Arabia announced that it would make a further voluntary supply cut of 1MMbbls/d for July, which would leave Saudi output at around 9MMbbls/d. There's also potential for this additional voluntary cut to be extended if needed.     What does it mean for the market? In the lead-up to the meeting, Saudi Arabia's Minister of Energy Prince Abdulaziz bin Salman built expectations for further supply cuts – and it was therefore crucial that the group came away from the meeting with a cut of some sort. The extension of supply cuts through until the end of 2024 should not change the outlook drastically. However, the supportive factor in the immediate term is the further voluntary cut from Saudi Arabia. This should provide some limited immediate upside for the market, and it should also reinforce Saudi Arabia’s commitment to try to put a floor under the market. We're leaving our price forecasts unchanged for now and still expect ICE Brent to average US$96 over the second half of this year. The macro outlook continues to be a more important driver for prices than fundamentals at the moment.     Why are the Saudi's cutting? Our balance sheet continues to show a tight oil market for the remainder of 2023 with a deficit of almost 2MMbbls/d through the latter part of the year. From a fundamental point of view, the Saudis do not need to cut supply further. But it's clear that they're trying to push prices higher, and we expect that they'd like to see Brent trading above US$80/bbl. Given the increased spending we've seen from the Saudi government as it looks to diversify its economy, the fiscal breakeven oil price has edged higher in recent years. Saudi Arabia needs a little over US$80/bbl to balance its budget – and we believe this is the level they will target.  

EUR: Range-bound into next week EUR/USD softened on the BoC rate hike yesterday as the implications for Federal Reserve policy proved the larger driver. The softening in EUR/USD did mask some further hawkish rhetoric, where the European Central Bank's influential Isabel Schnabel was still sounding pretty hawkish. Please see our full ECB preview here.   Today's session sees some revisions to eurozone 1Q GDP data - expected to be revised down after German figures. However, the market still looks comfortable pricing in two further 25bp ECB rate hikes by the late summer. Expect EUR/USD to remain becalmed well within a 1.0650-1.0750 range.   Elsewhere, we hear from Swiss National Bank (SNB) President Thomas Jordan at 1405CET today. The SNB is widely expected to raise the policy rate by 25bp to 1.75% on 22 June. Recent CPI releases have, though, shown core inflation dipping below 2.0% - a move that reduces the need for the SNB to drive the nominal Swiss franc any stronger. EUR/CHF could drift to 0.9800 should President Jordan acknowledge that better CPI trend today. Chris Turner     We have updated our calls on Norges Bank and NOK. As discussed in this note, we now expect Norges Bank to take rates to 3.75% (two more hikes from current levels) on the back of NOK’s weakness and we see non-negligible risks of a 4.00% peak rate. The short-term outlook for the krone remains clouded: the threat of more Fed tightening is keeping the illiquid and high-beta NOK under pressure, and domestically Norges Bank daily FX purchases have only been trimmed marginally in June. We expect rate hikes and potentially larger cuts to FX purchases later this year to pair with a solid set of fundamentals and a stabilisation in risk sentiment and bring EUR/NOK closer to 11.00 in late 2023.

FX strategy (with Frantisek Taborsky, EMEA FX & FI Strategist) HUF has been the clear winner YTD in the CEE region thanks to the subsiding energy crisis and very attractive carry due to the extreme high interest rate environment. Despite the first rate cut, HUF did not weaken thanks to the NBH’s transparent communication, which we expect will continue to remain as transparent as it has been so far this year.   We expect that the market will continue to favour the forint, which will continue to maintain a significantly higher carry within the region in the second half of the year. In our view, the playing field for the forint will be in the range of EUR/HUF 368-378 in the coming months and we target 372 for the end of the year.   Thus, we do not see much room for a move lower from current levels, which is supported by the very long positioning of the market. This will prevent further gains in the forint. We can still expect the NBH monetary policy and EU money story to be the main drivers. Higher volatility will remain in the market in the second half of the year and we may see some seasonal FX weakness especially during the summer months. However, market expectations for EU money are rather cautious and so we do not see room for a big sell-off, similar to that at the end of last year over this issue. Moreover, we should see a deal ultimately being agreed between the EC and the Hungarian government. Overall, we continue to like the forint and the NBH normalisation story. We expect investors might use any EUR/HUF spike to build new positions in forint and benefit from the significant carry.   FX – spot and INGF   Evolution of gross external debt (% of GDP)   Fixed income strategy (with Frantisek Taborsky, EMEA FX & FI Strategist and James Wilson, EM Sovereign Strategist)   The market is pricing in a large portion of NBH monetary policy normalisation, but we believe that the region's fastest disinflation and a record strong forint will support further market bets on policy easing. Our bias remains for a lower and steeper curve.. On the bond side, despite fiscal risks, we see this year's funding fully under AKK's control. HGBs post the highest gains within the region YTD, supported by the NBH's successful normalisation story and government measures.   On the other hand, HGBs are getting expensive after the recent rally. In the hard currency space, current valuations look about fair for REPHUN, with spread levels towards the wider end of the BBB tier.   Headline risk remains high amid the ongoing EU fund negotiations and geopolitical noise, which mean there are potential upside and downside catalysts, and volatility will remain elevated. Meanwhile, fundamentals are recovering from last year’s energy shock, in particular on the external accounts. Further FX issuance is likely later in the year, with the AKK guiding for a potential benchmark size EUR issue, in part to prefinance for 2024.   Local curve (%)   Public debt redemption profile (end-Mar 2023, HUFbn)

The Commodities Feed: Further Saudi cuts The oil market initially moved higher after Saudi Arabia announced a rollover of its additional supply cuts into August. However, the market failed to hold onto its gains with these cuts already largely expected.   Energy - Further oil supply cuts It was not too surprising that Saudi Arabia decided to roll over its additional voluntary cuts of 1MMbbls/d from July into August.  The market was largely expecting it, particularly in an environment rife with negative sentiment. However, what was more surprising was Russia announcing that they would reduce exports by 500Mbbls/d in August and also aim to reduce output by the same amount. Furthermore, Algeria will also make a further cut of 20Mbbls/d in August. The market initially reacted positively to the news, however, the gains were short-lived with Brent settling a little over 1% lower on the day. As mentioned, the Saudi cut was largely expected, and in fact, failing to roll over the cut would have put further downward pressure on the market. This leaves the Saudis in a difficult spot for the next few months, as they will have to be careful how they wind down this supply cut in the current environment. Although the Russian announcement was a surprise, there will be doubts within the market over whether Russia will actually make the cuts or not. Their track record this year has not been great. Russia supposedly cut supply by 500Mbbls/d earlier in the year. Yet seaborne crude oil exports from Russia have been above pre-war levels for much of this year. The price action yesterday is also a good illustration of what is driving oil prices at the moment. Fundamentals are not having as much influence on price direction as one would expect. Instead, the uncertain macro outlook is what the market is focused on. And it is difficult seeing this pattern changing significantly in the short term, though the additional cuts do put a stronger floor in place for Brent at around US$70/bbl. Therefore, we can expect the rangebound trading that we have become accustomed to will continue in the short term.

Tighter oil market over the second half of 2023 Fundamentals are not dictating oil prices at the moment. Instead, macro uncertainty and concerns over the China recovery are proving an obstacle to oil prices moving higher. In addition, expectations for a more hawkish US Fed will certainly not be helping risk appetite. Speculators have reduced their positioning in the market considerably in recent months. ICE Brent has seen the managed money net long fall from a year-to-date high of around 300k lots in February to around 160k lots in the last reporting week. This has predominantly been driven by longs liquidating, although there has also been a fair number of fresh shorts entering the market. We still expect global oil demand to grow by around 1.9MMbbls/d in 2023, and while this may appear aggressive in the current environment, it is more modest than some other forecasts – for example, the International Energy Agency forecasts demand to grow by 2.4MMbbls/d this year. Whilst we believe that our demand estimates are relatively modest, there are still clear risks to this view. The bulk of demand growth this year (more than 50%) is expected to be driven by China. So far this year, indicators for Chinese oil demand have been positive, as the economy has reopened. However, the concern is whether China will be able to keep this momentum going through the year. The risk is that the growth we have seen in domestic travel starts to wane as the effects of 'revenge' spending ease. Supply-side dynamics continue to provide a floor to the market. OPEC+ continues to cut and we have seen Saudi Arabia announce further voluntary supply cuts through the summer. Recently-announced cuts from Saudi Arabia, Russia and Algeria amount to a reduction of a little over 1.5MMbbls/d in supply over August 2023. Although, there are doubts over whether the 500Mbbls/d of cuts recently announced by Russia will be followed. It doesn’t appear as though Russia has stuck to a previous cut of 500Mbbls/d when you consider that Russian seaborne crude oil exports have been strong for most of the year. Drilling activity in the US has also slowed this year with the number of active oil rigs in the US falling from a year-to-date peak of 623 in mid-January to 545 recently, which is the lowest level since April 2022. While supply growth is still expected from the US, and output is set to hit record levels, the growth will be much more modest than in previous years. For 2023, US oil output is expected to grow in the region of 600-700Mbbls/d, while for 2024 growth is expected to be less than 200Mbbls/d. Higher costs, a tight labour market and an uncertain outlook all contribute to this more tepid growth. While the broader theme we have seen from US producers in recent years is to also be more disciplined when it comes to capital spending. We have revised lower our oil forecasts for the latter part of the year. A more hawkish Federal Reserve, limited speculative appetite (given the uncertain outlook), robust Russian supply and rising Iranian supply all suggest that the market will not trade as high as initially expected. We still forecast that the market will be in deficit over the second half of the year and so still expect the market to trade higher from current levels. We forecast ICE Brent to average US$89/bbl over 2H23.  

The Commodities Feed: Key US CPI release The oil market rallied more than 2% yesterday, leaving it at the top end of its recent trading range. US CPI data later today will be key for price direction in the immediate term.   Energy: Oil looking to breakout Oil prices pushed higher yesterday with ICE Brent trading to its highest level since early May and leaving it within striking distance of US$80/bbl. A break above US$80/bbl would see the market finally breaking out of the US$70-80/bbl range that it has been stuck in for more than two months. The market appears to be finally starting to reflect the tighter fundamentals that we see over the second half of 2023. Obviously, additional cuts announced by Saudi Arabia last week will be helping, while hopes of support measures for China’s economy will be offering some further optimism. However, macro developments are still likely to be key for the market in the near term. And today there will be plenty of focus on US CPI numbers. Expectations are for a print of 3.1% year-on-year for June, down from 4% in the previous month. We will need to see the number come in well below consensus to see any significant change to current expectations for the Federal Reserve to hike at its next meeting. API numbers released overnight were more bearish than expected, with US crude oil inventories increasing by 3MMbbls, while gasoline and distillate stocks also increased by 1MMbbls and 2.91MMbbls, respectively. The market had been expecting some small draws across crude and products. The more widely followed EIA inventory report will be released later today, but obviously, it is likely to be overshadowed by the US CPI release. Bloomberg ship tracking data shows that Russian seaborne crude oil exports fell by a little more than 1MMbbls/d WoW to 2.86MMbbls/d for the week ending 9 July. This also drags the four-week rolling average down to a little over 3.2MMbbls/d, which is the lowest level seen since January. The market will be watching Russian exports closely, as up until now there have been doubts over whether Russia is actually making the full supply cuts it announced earlier in the year. Yesterday, the EIA released its latest Short Term Energy Outlook, in which it forecasts 2023 US crude oil production to grow by 680Mbbls/d YoY to average a record 12.56MMbbls/d. Meanwhile, for 2024, supply growth is expected to slow to a little over 280Mbbls/d YoY, which would see output averaging 12.85MMbbls/d. This ties in with the slowdown in drilling activity that we have seen for much of this year. The number of active oil rigs in the US has fallen from a year-to-date high of 623 in January to 540 last week.

FX Talking: The dollar’s break point The first real signs of US disinflation this year have sent the dollar lower. We should now begin seeing a series of lower US inflation prints, which will support the soft-landing narrative and deliver the kind of cyclical dollar decline we have been expecting. This should be a better environment for pro-cyclical currencies, helping EUR/USD towards 1.15It has been a long time coming, but this month’s release of US June inflation data might actually be the point at which the dollar breaks lower. Like many, we had been looking for a cyclical drop in the dollar in the second half of 2023. Now some strong evidence of US disinflation might just be the catalyst for this important market adjustment. Within the G10 space, the biggest beneficiaries of the softer US price data have been the unloved Scandinavian currencies which had been the biggest victims of hard landing fears. What could now be the start of some sizable bullish steepening in the US yield curve will help the pro-cyclical currencies on the view that peak rates are close at hand. Our team looks for one last rate hike from the Federal Reserve and two further hikes from the European Central Bank. This should allow EUR/USD to better connect with its fundamentals, although we doubt that the rally will be as quick as the one seen last November-December. However, EUR/USD now has a clear bias towards 1.15 over the coming months and quarters. Elsewhere in G10, the Bank of Japan probably needs to normalise policy further to get USD/JPY trading well under 135 – but that certainly looks to be the direction of travel. Sterling may temporarily hold gains until UK price data softens – potentially in the fourth quarter. And the Swiss National Bank will continue to manage the trade-weighted Swiss franc stronger. Within EM, CE4 FX might struggle to rally substantially further against the euro and weak Chinese growth is proving a headwind. Yet, the EM asset class may now enjoy the strongest portfolio inflows since late 2020 and Latin currencies can continue to perform well given relatively large weightings in key benchmarks.  

Has the US turned a corner on inflation? Earnings may determine whether rally can be sustained Dow testing major resistance level   It’s shaping up to be quite a relaxed end to the week, one in which we’ve seen stellar gains on the back of some very encouraging inflation data from the US. While there have been occasions when stock markets have performed well this year despite not appearing to reflect the fundamental reality of rapid economy-threatening rate hikes, the inability to really turn a corner on inflation has held them back. But perhaps that corner is now being turned. Inflation was already well off its highs but there was something about this report that was different. Not only did it beat on the headline and core level but both of the monthly readings were also incredibly positive. Now it’s just a question of whether that can be sustained. The light at the end of the tightening tunnel is getting brighter and investors are increasingly confident of emerging after one more hike in two weeks. At which point the focus will turn to the economy and whether a soft landing can still be achieved before the discussion pivots to rate cuts. The next risk comes from earnings season which gets underway today, with JP Morgan, Wells Fargo, and Citigroup all reporting on the second quarter.   Can the Dow break a more than one-year resistance level? The Dow is back trading around its highest levels in more than a year on the back of this week’s strong performance. It’s tested these levels a couple of times over the last month and many more over the last year, each time being pushed back, but could this time be different?   US30 Daily   The fundamentals look more attractive which could be enough to give it that extra bump. But I’m not convinced by the momentum indicators, on this chart being the stochastic and MACD. They look a little underwhelming and the same is true on the 4-hour chart. That’s certainly not definitive and a breakout could provide that momentum that there doesn’t appear to currently be but they aren’t particularly supportive at this point. As far as further resistance above is concerned, 35,000 stands out as the next test, with 36,000 above that then key. We could see some resistance around 35,500 as well as price has responded to it in the past  

Tightness takes hold of the oil market The last month has seen the oil market convincingly break out of the range it has been stuck in since early May. Tightening fundamentals and prospects for a softer-than-expected landing for the US economy have pushed the market higher. Constructive fundamentals should mean more strength in the months ahead.   Oil prices still have more upside While the oil market has seen quite a bit of strength in recent weeks on the back of tightening in the physical market, we believe that there is still room for the market to move higher. Our balance sheet suggests that the oil market will continue to tighten as we move through the second half of the year with a deficit in the region of 2MMbbls/d. We have left our forecasts for the remainder of the year unchanged. We still expect ICE Brent to average US$86/bbl over 3Q23 and US$92/bbl over 4Q23. Our balance shows that the market will remain in deficit over 2024. However, this deficit is heavily skewed towards the second half of 2024. In fact, we see a small surplus in 1Q24, which suggests that prices could pull back early next year, before moving higher once again. While we still expect Brent to average US$90/bbl over 2024, we have revised the profile. The assumption behind our 2024 forecasts is that OPEC+ sticks to its planned production targets, whilst the 1.66MMbbls/d of additional voluntary cuts from a handful of OPEC+ producers also continue through 2024.   Oil market set to remain tight through 2024 (MMbbls/d)   Saudi cuts intensify market tightening It was largely expected that the oil market would tighten over the second half of 2023 due to OPEC+ supply cuts and further demand growth. OPEC+ has a production target of 41.86MMbbls/d through until the end of this year and 40.63MMbbls/d for 2024. However, in reality, we are seeing much deeper cuts from OPEC+. Firstly, a handful of OPEC+ members have made additional voluntary supply cuts of 1.66MMbbls/d. These are currently set to continue through until the end of 2024. In addition to this, Saudi Arabia announced a further voluntary cut of 1MMbbls/d for July but has since rolled this over in August and more recently into September. Saudi Arabia will want to be careful with how it goes about unwinding this. The ongoing cuts have finally had their desired effect for OPEC+ and specifically Saudi Arabia. Relaxing them too soon or too quickly will obviously have an unwanted impact on prices. This is particularly the case at the moment, where concerns are growing over the state of the Chinese economy with it clearly not recovering at the pace many had expected.     OPEC+ cuts and crude quality The scale of cuts we are seeing from OPEC+ might have taken time to be reflected in outright prices as well as time spreads. However, where it has been much more evident for several months, and only becoming increasingly more apparent, is in quality spreads. OPEC+ cuts have led to a reduction in medium sour crudes, whilst the supply growth we are seeing will be largely driven by lighter sweet crudes. This trend is well reflected in the Brent/Dubai spread which is seeing Brent trading at an unusual discount to Dubai. In fact, the spread has traded to deeper discounts than seen in 2020, where we saw 10MMbbls/d of supply cuts from OPEC+. The move in the spread suggests that we should be seeing Asian buyers turning increasingly to cheaper Atlantic Basin crudes. It is difficult to see a quick reversal in the Brent/Dubai spread, at least until we start to see Saudi and other OPEC+ members unwinding supply cuts. In the absence of this, we would likely need to see a tightening in the light sweet market. The tightness in the medium sour crude market is having an impact further downstream as well, with it leading to a tightening in the high sulphur fuel oil market. And in fact, in NW Europe this has seen the HSFO crack briefly trade at an unusual premium.   Russian oil supply risks Since Russia’s invasion of Ukraine, there has clearly been plenty of uncertainty over how Russian oil flows would evolve. However, Russia has surprised many in the market with how stubborn its export volumes have been. Large discounts have ensured that there have been willing buyers for this crude. Although, admittedly seaborne exports have been trending lower more recently, and the four-week rolling average has fallen below 3MMbbls/d, which is the lowest level seen since the start of the year. The supply cuts previously announced by Russia finally appear to be feeding through to lower export volumes. Although, it’s also worth pointing out that with Urals now trading above the G7 price cap, Western shipping and insurance cannot be used, although Russia seems to have built a fleet large enough to get around the price cap. There has also been an increase in tensions between Russia and Ukraine after Russia pulled out of the Black Sea Grain Initiative and threatened that any vessels calling at Ukrainian Black Sea ports could be treated as a potential military target. This development has only increased risks in the Black Sea with Ukraine retaliating with a similar threat. This obviously poses a potential risk to Russian crude oil exports from Novorossiysk with exports in the region of 500Mbbls/d. However, this is not the only volume exported from Russian Black Sea ports, Kazakhstan also exports in the region of 1.3MMbbls/d from the CPC terminal in Novorossiysk.   For now, though, the risk to this supply is thought to be low. Whilst Ukraine has targeted two Russian vessels recently, it has ]refrained from targeting commercial vessels. Any disruptions to energy or food supplies from the region will likely not be well received by Western allies.    US drilling activity continues to slow The number of active oil rigs in the US has fallen by a little more than 15% since the start of the year to 525, according to Baker Hughes, which has left oil rigs at their lowest levels since March 2022. This slowdown in drilling activity will unsurprisingly have an impact on the supply outlook, specifically over 2024. US crude oil supply is expected to grow by a little over 200Mbbls/d between July and December this year, whilst in 2024, average annual supply is expected to grow by a little more than 300Mbbls/d year-on-year. While more modest supply growth is expected, the US is still forecast to produce record levels of crude oil this year as well as in 2024. As for US inventories, commercial inventories continue to trend lower, having fallen by close to 42MMbbls since mid-March to a little under 440MMbbls currently. Stocks are at their lowest levels since early January, and whilst they are above the levels seen at this stage last year, they are trending just below the five-year average (a number which is admittedly inflated by 2020 inventory numbers). We are likely to see crude inventories continue to trend lower until September, which is when we should start to see refinery run rates fall due to refinery maintenance.     Global oil demand growth dominated by China (MMbbls/d)   Demand concerns linger Despite lingering demand concerns, global oil demand is still set to grow by around 1.9MMbbls/d this year to a record 101.8MMbbls/d. More than 60% of this growth is driven by China. Therefore, it is not too surprising to see that the oil market is nervous given the weaker-than-expected Chinese macro data that we have seen recently. However, despite this weaker data, the oil-related numbers remain largely supportive. Crude oil exports so far this year average 11.26MMbbls/d, up 12.4% YoY. Refinery activity has hit record levels this year, with a record 14.94MMbbls/d processed in March, whilst activity in July was the second highest on record. Finally, apparent oil demand has also hit record levels this year with the post-Covid rebound. Obviously crucial for the market is whether these numbers are sustainable over the second half of the year, given the slowdown we are seeing in other parts of the economy. The US for much of the year has also been a concern for the market. Given the pace of rate hikes, market participants were expecting a fairly aggressive slowdown in the latter part of 2023. However, the market is coming around to the idea that the US may be able to pull off a soft landing. We are still assuming that US oil demand will be largely flat year-on-year, but this may be too conservative, given that implied gasoline demand has been tracking above last year’s levels for much of the year. Implied US gasoline demand so far this year has averaged 8.88MMbbls/d, up by 1.4% YoY.   Speculators still holding a fairly neutral position in ICE Brent (000 lots)   Speculators holding back Speculative activity in oil, as in most commodities, continues to be relatively muted. This is despite constructive oil fundamentals for the remainder of the year. Speculators appear to be reluctant to carry too much risk at a time when China's recovery is clearly not going to plan, while there has also been plenty of uncertainty over how much more tightening we could see from central banks. When you combine these uncertainties along with higher rates, speculators may be less willing to hold too large an exposure in oil. However, any change in speculative appetite, combined with the current supportive fundamentals, could propel prices higher. From a historical perspective, speculators still have plenty of room to increase their positioning.     ING oil forecasts

Oil prices have strengthened over the summer as fundamentals tighten, whilst natural gas prices have been volatile, with potential strike action in Australia leading to LNG supply uncertainty. Chinese concerns are weighing on metals, but grain markets appear more relaxed despite the collapse of the Black Sea deal.   Oil market tightness to persist Oil prices have strengthened over the summer, with ICE Brent convincingly breaking above US$80/bbl. The strength in the flat price has coincided with strength in time spreads, reflecting a tightening in the physical oil market. OPEC+ cuts, and in particular additional voluntary cuts from Saudi Arabia, mean that the market is drawing down inventories. We expect this trend will continue until the end of the year, which suggests that oil prices still have room to move higher from current levels. While the fundamentals are constructive, there are clear headwinds for the oil market. Firstly, it is becoming more apparent that the Fed will likely keep interest rates higher for longer and that, along with renewed USD strength, is a concern for markets. Secondly, Chinese macro data continues to disappoint, raising concerns over the outlook for the Chinese economy and what this ultimately means for oil demand. That said, up to now, Chinese demand indicators remain pretty strong. We expect the tight oil environment to persist through much of 2024 with limited non-OPEC supply growth, continued OPEC+ cuts and demand growth all ensuring that global inventories will decline. However, we could see some price weakness in early 2024, with the market forecast to be in a small surplus in the first quarter of next year before moving back into deficit for the remainder of 2024, which should keep prices well supported. The risks to our constructive view on the market (other than China demand concerns) include further growth in Iranian supply despite ongoing US sanctions and a possible easing in US sanctions against Venezuela, which could lead to some marginal increases in oil supply.  

The Commodities Feed: LNG strike action delayed The oil market has shrugged off the weakness seen in equity markets with strong fundamentals continuing to support prices. Meanwhile, European gas prices came under pressure yesterday with delayed strike action at Australian LNG facilities raising hopes that parties could come to a deal.   Energy - Saudis increase prices into most regions Sentiment in the oil market remains constructive after Saudi Arabia and Russia decided to extend their voluntary supply cuts by three months. ICE Brent managed to edge higher yesterday, settling at US$90.60/bbl, whilst the Brent Dec’23/Dec’24 spread continues to surge, settling at a backwardation of US$7.28/bbl, up from less than US$4/bbl in late August. The strength in time spreads is clearly indicating tightness in the oil market. Our balance sheet shows that the market remains in deep deficit through until year-end, before moving back into a small surplus in 1Q24. While this surplus may lead to some price weakness early next year, we believe that it will be short-lived with the market set to return to deficit over the latter part of 2024.   Following the extension of Saudi cuts and the tightness in the market, it was no surprise that Saudi Arabia increased its official selling prices (OSP) for most grades of its crude into most regions. The flagship Arab Light into Asia saw its OSP raised by US$0.10/bbl MoM to US$3.60/bbl over the benchmark for October - the highest level seen so far this year. All other grades into Asia also saw increases, while similar action was taken for grades into the US and Med. Europe was the only region which saw some relief, with OSP’s for all grades cut. API data released overnight was constructive, showing that US crude oil inventories fell by 5.5MMbbls, This is larger than the roughly 2MMbbls draw the market was expecting. In addition, crude oil inventories at the WTI delivery hub, Cushing, declined by 1.35MMbbls. On the product side, gasoline stocks fell by 5.1MMbbls, while distillate stocks increased by 300Mbbls. The increase in distillate stocks was marginal but will help ease some concern over low middle-distillate inventories as we head into the northern hemisphere winter. The more widely followed EIA inventory report will be released later today.   Natural gas prices came under significant pressure yesterday with TTF falling by almost 10%. This is after growing optimism that strike action at two of Chevron’s LNG facilities in Australia may be avoided. Partial strike action was meant to start at Gorgon and Wheatstone today. However, this has been delayed until tomorrow as the company and unions continue to work towards a deal. The two facilities make up around 6% of global LNG supply so the market continues to watch these developments closely. The European market will also have to deal with lower Norwegian gas flows for a little bit longer than originally anticipated. Field maintenance at several fields, including Troll has been extended by a couple of days. Total Norwegian flows are around 137mcm/day, compared to more than 300mcm/day in mid-August.

CAD: Inflation data important after strong jobs numbers The second quarter growth figure shock seemed to have put an end to the Bank of Canada’s mid-2023 tightening reboot. The BoC did leave the door open for more hikes if needed on 6 September, but the deterioration in the economic outlook and less concerning inflation picture all pointed to an extended pause. The August jobs figures were, however, very strong: a 40k employment jump (twice the consensus number), an unchanged unemployment rate after three consecutive months where it inched higher, a big rise in full-time hiring and accelerating wage growth. With gasoline prices having risen, headline inflation is expected to have accelerated from 3.3% to 3.8% in August. Markets and the BoC will look at the trim and median measures, which are seen stabilising around 3.7%. Any upside surprise in the inflation figures would likely put a BoC rate hike back on the table, even though it is not our base case at the moment to see another BoC move. Markets are pricing in 15bp to a peak, and we could see that being pushed to 20bp or higher after a strong CPI read today. Given its stretched overvaluation, we had been calling for a correction in USD/CAD for a while: the pair is reconverging (i.e., dropping) with short-term fundamentals now, and a potential post-CPI rally could see it slip further to 1.3400.