geopolitical situation

Older buildings are making way for new ones, and the trend of redeveloping plots in the centers of large cities in Poland is intensifying. Furthermore, the plans include not only new development projects that arise after demolitions but also transforming existing office buildings into residential projects, including those in PRS (Private Rented Sector) formula. The huge demand in the rental housing market in Poland, coupled with a gradual increase in rental rates amidst a significant housing shortage, is encouraging investors to undertake further projects in the PRS formula. Paradoxically, the geopolitical and macroeconomic situation, including war in Ukraine, is also conducive to the development of such investments, as it generates additional potential tenants. Above all, the Polish market still offers the opportunity to achieve higher investment returns than the Western European market. According to Avison Young experts, the value of transactions closed in 2022 could be estimated at 150 million euros, and cumulatively from 2014, it reached 325 million euros. However, the true dynamics of the sector is reflected in volume of forward funding transactions. Only in the years 2021-2022, according to Avison Young's analysis, it amounted to 700 million euros. Investors' announcements indicate that the plans for the upcoming years include the construction of another ~ 25,000 apartments for rent in Poland. PRS investments are mainly taking place in the largest cities in the country, with 40% of the currently active PRS stock, totaling 12,500 apartments, located in Warsaw. Over 13,000 units are currently under construction, with approximately 4,500 expected to be delivered this year. However, it is still not enough considering the demand.   Land at a premium A serious obstacle to the development of residential investments is the shortage of available land in attractive areas of the largest Polish cities. As a result, investors are seeking alternative solutions, such as acquiring parcels with older buildings that can be adapted to new functions or demolished. The trend of real estate conversions is intensifying on the market. The advantage of investments based on demolition or modernization of existing facilities is shorter administrative procedures, which do not require road approvals or participation in the construction of the surrounding infrastructure. - The number of inquiries regarding analyses of the possibility of adapting existing commercial properties for new purposes is increasing. In such cases, our team evaluates, among other things, the profitability of the investment, considering options of demolishing older office buildings or transforming them into PRSs. When planning such actions, investors seek well-located, easy accessible office buildings, with a rich offering of gastronomy and services in the vicinity. The profitability analysis of the investment indicates the direction for further investor’s actions. Functionally and technically worn-out office buildings generate lower income and are less attractive to tenants compared to modern office buildings that additionally meet ESG requirements. Therefore, it is often more cost-effective to consider a new function for the building, demolish or convert it into a product tailored to the current market's needs. – says Monika Bronicka, Head of Valuation and Advisory at Avison Young.   More and more demolitions in Warsaw One can see with the naked eye an increasing number of demolitions of commercial buildings in Poland. The value of older structures situated on attractive urban land is often lower than that of undeveloped plots. Investors are especially eager to buy such properties, when it is possible to obtain a permit for the construction of a modern facility with a larger usable floor space. Strict ESG standards and the need to adapt decades-old buildings to current environmental norms associated with sustainable development, as well as the desire to reduce maintenance and operating costs, also motivate changes and modernization of properties. Market participants are wondering how many more demolitions will occur in the near future, since even twenty-something-year-old buildings are disappearing from the landscape of Warsaw, such as: - Atrium International from 1995 will be replaced by the over 130-meter Upper One skyscraper and a 55-meter hotel - Empark Mokotów Business Park is being redeveloped by Echo Investment and will be partially replaced with new residential buildings - the unfinished EuRoPol Gaz office building is already being demolished, Dom Development will develop residential buildings in this area - Multikino Ursynów (building from 1999) was acquired by GH Development from Belgium; the new owner has announced the construction of a mixed-use building with about 300 apartments   Regional cities are not falling behind either Echo Investment is also preparing a project using demolition in Lodz. At 127 KiliÅ„skiego Street, in the place of an old tenement house, the investor is currently constructing a residential-hotel building. There will be about 290 residential units for short-term or subscription rental. Strabag Real Estate, in turn, has obtained permission to build 40,000 square meters of space on the site of the Plaza Gallery in Kraków, which is earmarked for demolition. The company is planning to develop a mixed-use project on the plot. Meanwhile, the former Impel office building, which stood at Åšlężna Street, disappeared from the map of WrocÅ‚aw. In its place, Develia started the construction of a residential complex with commercial premises. These are just a few examples of demolition and new development projects in Polish regional cities.   No-demolition option An alternative to demolitions is converting the existing buildings and changing their functions. Such actions are undoubtedly more environmentally friendly, as the carbon footprint associated with demolitions and constructing new structures is significantly higher. Avison Young's team of technical advisors has had the opportunity to analyze office buildings several times in terms of converting them into residential buildings, without the need for demolition. It turns out that it is not that difficult as it may seem, given the existing technical conditions. It is certainly much easier to change the functional use of office buildings to residential than the other way around.   Live loads Based on the proposed structure and assumed service loads, according to the PN-EN 1991-1-1 standard for residential buildings, it is recommended to assume a load of 2 kN/m², while for office buildings, a load of 3 kN/m² is typically considered. Therefore, when changing the use of a building, there is a load capacity reserve for the floor slabs that can be utilized as needed.   Higher ceilings According to the current technical conditions, the minimum ceiling height for workspaces intended for more than 4 people is 3 meters, while the minimum height for residential rooms is 2.5 meters. Planned apartments can, therefore, have higher ceilings, which is desirable in the market and also allows for more space for the sub-ceiling installations.   The question of daylight - One technical challenge that can be observed is related to the dimensions of office buildings. Most office spaces are designed as open space areas and rely on extensive glazing to provide daylighting throughout the space. However, when converting such buildings into residential units, it is necessary to consider the architectural possibilities to ensure compliance with technical requirements, including adequate daylighting. This typically involves maintaining a ratio of window area to floor area of 1:8. Any changes in the layout require a careful and thoughtful approach to ensure that the residential units are both functional and well-lit. – says PrzemysÅ‚aw KÅ‚opocki, Project Manager (Building Aspects), Technical Advisory & Project Management at Avison Young. The current regulations for transmission coefficients of the building envelope have been tightened significantly over the past years. When planning a change in the functional use of an existing office building with extensive glazing, consideration must be given to potential modifications or upgrades to minimize the building's energy consumption due to heat losses through the external walls and windows.   Closed windows When planning a change of use from office to residential, it is important to consider that many existing office buildings have non-operable windows, which necessitates the use of mechanical ventilation. Ventilation issues can be addressed by partially adapting the existing systems to meet the needs of future residents, taking into account the anticipated lower occupancy density of the building.   The biggest challenges - Adapting to the remaining sanitary needs becomes the most challenging. – says Karolina HytroÅ›, Project Manager (Sanitary Installations), Technical Advisory & Project Management at Avison Young. – Office buildings often have a single sanitary riser located in the core of the building, and it is necessary to expand the installation with numerous new supply pipes for bathrooms and kitchens in residential units. Additionally, the heating and cooling system is typically based on freon or glycol systems utilizing fan coil units, which may pose challenges in reusing them within the new functional layout of the floors.   - The electrical installation also requires adaptation; it is necessary to expand telecommunication installations enabling television reception, Internet access, and efficient access control. - adds Kamil Olechniewicz, Project Manager (Electrical Installations), Technical Advisory & Project Management at Avison Young.   Due to fire safety regulations in residential buildings, it is usually necessary to implement an extended fire alarm system. However, these challenges do not prevent the building from being adapted for residential use.   Summary Changing the use from office to residential in terms of technical aspects should not be problematic in many cases. However, it is important to consider that maintaining the desired level of Usable Floor Area (UFA) can be challenging. This may result in a lower profitability compared to a typical multifamily residential building, where every square meter is utilized almost 100% efficiently in the planning process.   - However, it is worth considering that older office buildings often differ significantly in terms of standards from modern and energy-efficient Class A office buildings. In this respect, converting them to a residential function may be more profitable than continuing to maintain increasingly less attractive and difficult-to-lease office space. - says Tomasz Daniecki, Director, Head of Technical Advisory at Avison Young. Especially since older office buildings are usually located in well-connected areas, which is often a key aspect for residents when choosing a place to live. Such locations often fit into the concept of the "15-minute city," which is gaining increasing popularity lately.

Demolition or redevelopment? Older buildings are making way for new ones, and the trend of redeveloping plots in the centers of large cities in Poland is intensifying. Furthermore, the plans include not only new development projects that arise after demolitions but also transforming existing office buildings into residential projects, including those in PRS (Private Rented Sector) formula.   The huge demand in the rental housing market in Poland, coupled with a gradual increase in rental rates amidst a significant housing shortage, is encouraging investors to undertake further projects in the PRS formula. Paradoxically, the geopolitical and macroeconomic situation, including war in Ukraine, is also conducive to the development of such investments, as it generates additional potential tenants. Above all, the Polish market still offers the opportunity to achieve higher investment returns than the Western European market. According to Avison Young experts, the value of transactions closed in 2022 could be estimated at 150 million euros, and cumulatively from 2014, it reached 325 million euros. However, the true dynamics of the sector is reflected in volume of forward funding transactions. Only in the years 2021-2022, according to Avison Young's analysis, it amounted to 700 million euros.   Investors' announcements indicate that the plans for the upcoming years include the construction of another ~ 25,000 apartments for rent in Poland. PRS investments are mainly taking place in the largest cities in the country, with 40% of the currently active PRS stock, totaling 12,500 apartments, located in Warsaw. Over 13,000 units are currently under construction, with approximately 4,500 expected to be delivered this year. However, it is still not enough considering the demand.   Land at a premium A serious obstacle to the development of residential investments is the shortage of available land in attractive areas of the largest Polish cities. As a result, investors are seeking alternative solutions, such as acquiring parcels with older buildings that can be adapted to new functions or demolished. The trend of real estate conversions is intensifying on the market.   The advantage of investments based on demolition or modernization of existing facilities is shorter administrative procedures, which do not require road approvals or participation in the construction of the surrounding infrastructure.   - The number of inquiries regarding analyses of the possibility of adapting existing commercial properties for new purposes is increasing. In such cases, our team evaluates, among other things, the profitability of the investment, considering options of demolishing older office buildings or transforming them into PRSs. When planning such actions, investors seek well-located, easy accessible office buildings, with a rich offering of gastronomy and services in the vicinity.   The profitability analysis of the investment indicates the direction for further investor’s actions. Functionally and technically worn-out office buildings generate lower income and are less attractive to tenants compared to modern office buildings that additionally meet ESG requirements. Therefore, it is often more cost-effective to consider a new function for the building, demolish or convert it into a product tailored to the current market's needs. – says Monika Bronicka, Head of Valuation and Advisory at Avison Young.    

More and more demolitions in Warsaw One can see with the naked eye an increasing number of demolitions of commercial buildings in Poland. The value of older structures situated on attractive urban land is often lower than that of undeveloped plots. Investors are especially eager to buy such properties, when it is possible to obtain a permit for the construction of a modern facility with a larger usable floor space. Strict ESG standards and the need to adapt decades-old buildings to current environmental norms associated with sustainable development, as well as the desire to reduce maintenance and operating costs, also motivate changes and modernization of properties. Market participants are wondering how many more demolitions will occur in the near future, since even twenty-something-year-old buildings are disappearing from the landscape of Warsaw, such as: - Atrium International from 1995 will be replaced by the over 130-meter Upper One skyscraper and a 55-meter hotel - Empark Mokotów Business Park is being redeveloped by Echo Investment and will be partially replaced with new residential buildings - the unfinished EuRoPol Gaz office building is already being demolished, Dom Development will develop residential buildings in this area - Multikino Ursynów (building from 1999) was acquired by GH Development from Belgium; the new owner has announced the construction of a mixed-use building with about 300 apartments    Regional cities are not falling behind either Echo Investment is also preparing a project using demolition in Lodz. At 127 Kilińskiego Street, in the place of an old tenement house, the investor is currently constructing a residential-hotel building. There will be about 290 residential units for short-term or subscription rental. Strabag Real Estate, in turn, has obtained permission to build 40,000 square meters of space on the site of the Plaza Gallery in Kraków, which is earmarked for demolition. The company is planning to develop a mixed-use project on the plot. Meanwhile, the former Impel office building, which stood at Ślężna Street, disappeared from the map of Wrocław. In its place, Develia started the construction of a residential complex with commercial premises. These are just a few examples of demolition and new development projects in Polish regional cities.   No-demolition option An alternative to demolitions is converting the existing buildings and changing their functions. Such actions are undoubtedly more environmentally friendly, as the carbon footprint associated with demolitions and constructing new structures is significantly higher. Avison Young's team of technical advisors has had the opportunity to analyze office buildings several times in terms of converting them into residential buildings, without the need for demolition. It turns out that it is not that difficult as it may seem, given the existing technical conditions. It is certainly much easier to change the functional use of office buildings to residential than the other way around.   Live loads  Based on the proposed structure and assumed service loads, according to the PN-EN 1991-1-1 standard for residential buildings, it is recommended to assume a load of 2 kN/m², while for office buildings, a load of 3 kN/m² is typically considered. Therefore, when changing the use of a building, there is a load capacity reserve for the floor slabs that can be utilized as needed.   Higher ceilings According to the current technical conditions, the minimum ceiling height for workspaces intended for more than 4 people is 3 meters, while the minimum height for residential rooms is 2.5 meters. Planned apartments can, therefore, have higher ceilings, which is desirable in the market and also allows for more space for the sub-ceiling installations.   The question of daylight  - One technical challenge that can be observed is related to the dimensions of office buildings. Most office spaces are designed as open space areas and rely on extensive glazing to provide daylighting throughout the space. However, when converting such buildings into residential units, it is necessary to consider the architectural possibilities to ensure compliance with technical requirements, including adequate daylighting. This typically involves maintaining a ratio of window area to floor area of 1:8. Any changes in the layout require a careful and thoughtful approach to ensure that the residential units are both functional and well-lit. – says Przemysław Kłopocki, Project Manager (Building Aspects), Technical Advisory & Project Management at Avison Young. The current regulations for transmission coefficients of the building envelope have been tightened significantly over the past years. When planning a change in the functional use of an existing office building with extensive glazing, consideration must be given to potential modifications or upgrades to minimize the building's energy consumption due to heat losses through the external walls and windows.   Closed windows When planning a change of use from office to residential, it is important to consider that many existing office buildings have non-operable windows, which necessitates the use of mechanical ventilation. Ventilation issues can be addressed by partially adapting the existing systems to meet the needs of future residents, taking into account the anticipated lower occupancy density of the building.   The biggest challenges - Adapting to the remaining sanitary needs becomes the most challenging. – says Karolina Hytroś, Project Manager (Sanitary Installations), Technical Advisory & Project Management at Avison Young. – Office buildings often have a single sanitary riser located in the core of the building, and it is necessary to expand the installation with numerous new supply pipes for bathrooms and kitchens in residential units. Additionally, the heating and cooling system is typically based on freon or glycol systems utilizing fan coil units, which may pose challenges in reusing them within the new functional layout of the floors. - The electrical installation also requires adaptation; it is necessary to expand telecommunication installations enabling television reception, Internet access, and efficient access control. - adds Kamil Olechniewicz, Project Manager (Electrical Installations), Technical Advisory & Project Management at Avison Young. Due to fire safety regulations in residential buildings, it is usually necessary to implement an extended fire alarm system. However, these challenges do not prevent the building from being adapted for residential use.   Summary Changing the use from office to residential in terms of technical aspects should not be problematic in many cases. However, it is important to consider that maintaining the desired level of Usable Floor Area (UFA) can be challenging. This may result in a lower profitability compared to a typical multifamily residential building, where every square meter is utilized almost 100% efficiently in the planning process. - However, it is worth considering that older office buildings often differ significantly in terms of standards from modern and energy-efficient Class A office buildings. In this respect, converting them to a residential function may be more profitable than continuing to maintain increasingly less attractive and difficult-to-lease office space. - says Tomasz Daniecki, Director, Head of Technical Advisory at Avison Young. Especially since older office buildings are usually located in well-connected areas, which is often a key aspect for residents when choosing a place to live. Such locations often fit into the concept of the "15-minute city," which is gaining increasing popularity lately.  

Higher start expected for Europe as we drift towards quarter end    Despite weekend events in Russia, European markets proved to themselves to be reasonably resilient yesterday, finishing the day mixed even as the DAX and FTSE100 sank to multi week lows before recovering.     US markets didn't fare much better with the Nasdaq 100 sliding sharply, while the Russell 2000 finished the day higher. While equity markets struggled to make gains there wasn't any sign of an obvious move into traditional haven assets which would indicate that investors had significant concerns about what might come next.     If anything, given how events have played out over the last few years, and the challenges that have faced global investors, the view appears to be let's worry about what comes next when and if it happens, rather than worrying about what might happen in what is becoming an increasingly fluid geopolitical situation.   Bond markets appeared sanguine, as did bullion markets with gold finishing modestly higher, while the US dollar finished the day slightly lower, ahead of the start of this week's ECB central bank forum in Sintra, Portugal which starts today.     Oil prices found themselves edging higher yesterday, largely due to uncertainty over the weekend events in Russia given its position as a key oil and gas producer.   The prospect that we might see supply disruptions if the geopolitical situation deteriorates further may have prompted some precautionary buying. While the crisis appears to have passed quickly the fact that it happened at all has been a bit of a wakeup call and raised some concerns about future long term political stability inside Russia.     One other reason for the so far muted reaction to recent events is that we are coming to the end of the month as well as the first half of the year, with investors indulging in portfolio tweaking rather than any significant shift in asset allocation.   With H2 fast approaching the key decisions are likely to involve determining how many more rate rise decisions are likely to come our way, and whether we can avoid the prospect of a recession in the US.   As far as the UK is concerned it's going to be difficult to see how we can avoid one, having just about avoided the prospect at the end of last year, while the EU is already in one. The US continues to stand out, although even here there is evidence that the economy is starting to slow.     On the data front there isn't much in the way of numbers before the back end of the week and various inflation numbers from Germany, France and the EU, as well as the US. Today we have the latest US durable goods numbers for May, as well as housing data for April and May, which are expected to show signs of softening, and consumer confidence numbers for June. Consumer confidence has been one area which has proved to be the most resilient edging up in May to 102.3. This is expected to continue in June to 103.90, in a trend that appears to be matching the resilience of the labour market.     EUR/USD – not much in the way of price movement yesterday, with resistance back at last week's high just above the 1.1000 level, with the main resistance at the April highs at 1.1095. This remains the next target while above the 50-day SMA at 1.0870/80 which is acting as support. Below 1.0850 signals a move towards 1.0780.     GBP/USD – quiet session yesterday but still holding above the lows of last week, and support at the 1.2680/90 area. Below 1.2670 could see a move towards the 50-day SMA. Still on course for a move towards the 1.3000 area but needs to clear 1.2850.      EUR/GBP – struggling for momentum currently having failed at the 0.8630/40 area last week. The main support is at last week's low at the 0.8515/20 area. A move through 0.8640 could see a move towards 0.8680. While below the 0.8630 area the bias remains for a return to the recent lows.     USD/JPY – while above the 142.50 area, the risk is for a move towards 145.00. This support area which was the 61.8% retracement of the 151.95/127.20 down move, needs to hold or risk a return to the 140.20/30 area. as it looks to close in on the 145.00 area. This now becomes support, with further support at 140.20/30.      FTSE100 is expected to open 22 points higher at 7,475     DAX is expected to open 30 points higher at 15,843     CAC40 is expected to open 20 points higher at 7,204

After breaking the key resistance level of 21,700 in March, Bitcoin pulled the quotes of popular altcoins into the bull market zone. In the middle of last month, the BTC/USDT pair again became the driving force behind the positive dynamics of the digital currency market. In just two days, on June 20 and 21, the BTC/USDT exchange rate grew by 12%, and at the end of June, the pair updated its 12-month high at the 31,443 mark. The sharp growth of Bitcoin, which Ethereum later joined, occurred amid several positive news for the crypto market.     In particular, the U.S. Securities and Exchange Commission (SEC) in June received applications from five major asset management companies: WisdomTree Inc., Invesco Ltd., Valkyrie Funds, Fidelity Investments, and BlackRock Inc. to create a new investment product (spot Bitcoin ETF). Companies Citadel, Fidelity, and Charles Schwab launched their own decentralized crypto exchange. At the end of the month, another of the world's largest investment companies, Invesco, applied to launch a spot Bitcoin ETF.   The rapid growth of interest from large corporations in cryptocurrencies may also be due to the anticipation of their approval by global regulators as a means of payment. Thus, after the Fed meeting that ended on June 14, Chairman Jerome Powell announced the need for the Fed to be involved in the regulation of the stablecoin market, which he called a "form of money," not securities. If the Fed approves stablecoins as a means of payment, they will become a real alternative to fiat money. At the end of last month, the largest U.S. asset management company, BlackRock, also filed an application for a spot Bitcoin ETF to the SEC. After these reports, trading volumes in the crypto market began to grow and, at the beginning of last week, already amounted to 19.5 billion dollars. Buyer interest in stablecoins is supported, among other things, by an unstable geopolitical situation in the world, remaining tense amid a military conflict in Ukraine and a brewing conflict in Taiwan, threatening a direct clash between the U.S. and China.   Negative points for the crypto market include the continued pressure from the Securities and Exchange Commission (SEC) on leading digital platforms Binance and Coinbase, which is also spreading in European countries. In the UK, the Binance branch (Binance Markets Limited) will no longer be able to operate in the country, as it lost its license from British regulators. Binance branches in Germany and Belgium are also in a difficult position. At the end of last month, it also became known that U.S.   President Joe Biden promised to reform the tax system, "eliminating loopholes for Bitcoin and crypto traders." This could specifically refer to the short-term trading operations of crypto traders, who sell and buy ba ck cryptocurrencies in a short period of time, allowing them to avoid higher tax rates. Moreover, speaking at the European Central Bank Forum last week, Fed Chair Powell confirmed the possibility of further interest rate hikes, which could support the U.S. dollar, including in relation to cryptocurrencies (in pairs with the USDT stablecoin).   Therefore, despite the bullish sentiment of Bitcoin buyers, a somewhat contradictory situation has developed in the digital currency market, not allowing Bitcoin and other popular altcoins to develop a more confident upward trend.  

Czech National Bank Preview: Day of Reckoning We expect the CNB to start the cutting cycle with a 25bp move at the November meeting. The central bank will also unveil a new forecast with a significant revision in the dovish direction. We see the geopolitical situation and the impact on energy prices and EUR/CZK as the main risk to our call at the moment.   Cutting cycle starts The Czech National Bank will meet on Thursday next week when it will present its last forecast published this year. We go into the meeting expecting the first rate cut of 25bp to 6.75%, a view we have held since June. On the data front, a lot has changed in the economy since the CNB's August forecast, and almost everything is pointing in a more dovish direction. GDP is expected to be revised significantly downwards, especially for the first half of the next year and not only because of domestic weakness but also the outlook for abroad. The labour market, while still tight, is showing slower wage growth than the CNB expected in August. Most importantly, inflation is below the central bank's forecast. Headline inflation for Q3 came in at 0.1pp, and core inflation at 0.3pp on average below expectations. Add to that, energy prices! They look set to fall faster than expected in the coming months and in January.   New forecast will convince the undecided votes Moreover, the CNB is already behind the curve, given that the Bank's model indicates rate cuts earlier. This, combined with other deviations from the forecast, should lead to a significant revision in the path of interest rates of around 50bps on average over the forecast horizon. On the other hand, this is countered by a weaker CZK, which the CNB expects to reach current levels only in Q1 next year. However, the board's communication seems to suggest that the weaker koruna is not a problem for now. We believe the pain threshold for delaying a rate cut would be the 25.0 EUR/CZK level, which we don't see on the table for now. Board members are basically unanimous in their statements that the November meeting is the first live one for a rate cut and we believe the new forecast will convince the undecided votes. Otherwise, we believe a rate cut will be delayed only until December, but next week's meeting should already show some votes for a rate cut. In general, we see the main risks more at the global level, especially the impact on energy prices and EUR/CZK, which is probably the CNB's main focus these days.    

The Commodities Feed: Energy starts 2024 on a softer note Energy markets started the new year weaker with both oil and gas prices coming under pressure yesterday. This is despite growing tensions in the Middle East.   Energy – Oil starts the year weaker The oil market started the first trading day of 2024 on a softer note with ICE Brent settling almost 1.5% lower yesterday. Energy markets were unable to escape the broader pressure seen on risk assets with equity markets also weaker. The weakness in oil comes despite a ratcheting up in tensions in the Middle East. Iran has sent a warship to the Red Sea after the US sunk several Houthi boats in the region, following a number of attacks on commercial ships by the Houthis. While the geopolitical situation is a concern for the oil market, a fairly comfortable oil balance over the first half of 2024 does help to ease some of these worries. OPEC+ will hold a Joint Ministerial Monitoring Committee meeting in early February, according to Bloomberg. The group will be keen to discuss the state of the oil market, particularly given the price action seen following the announcement of deeper cuts last month from a handful of members. However, given the scale of cuts we are already seeing, it will be increasingly difficult for the group to cut more if needed over the course of 2024. Already, the last few rounds of cuts have been driven by voluntary reductions from individual members rather than group wide cuts – a sign that it is becoming more difficult to get all members on board to cut. European gas prices have come under significant pressure, with TTF settling 5.5% lower yesterday and at its lowest levels since August. This weakness comes despite forecasts for colder weather later in the week. However, storage remains very comfortable with it a little more than 86% full, which is above the 83.5% seen at the same stage last year. In the absence of any supply shocks or demand surge, it is looking likely that European storage will finish the 2023/24 heating season around 50% full, which suggests limited upside for prices.

The Commodities Feed: EU sanction plans on Russian aluminium An easing USD offered support to the commodity complex, with oil prices edging higher this morning. On the inventory side, API numbers remained largely bullish for the oil market. Meanwhile, recent reports of EU plans to sanction Russian aluminium helped to lift aluminium prices.   Energy – Weaker USD supports the complex The oil market has been trading higher this morning as a sharp drawdown in oil inventories reported by API helped to improve the broader sentiment. Meanwhile, a softer dollar also supported the complex. The prompt spread for Brent has moved into a deeper backwardation of US$0.43/bbl up from just US$0.03/bbl at the start of the year, indicating tighter near-term conditions. Recent numbers from the American Petroleum Institute (API) reported yesterday remained largely constructive. US crude oil inventories fell by 6.67MMbbls over the last week, significantly larger than the market expectations. Similarly, Cushing crude oil stocks are reported to have decreased by 2.03MMbbls. On the other hand, a sharp rise in gasoline stocks weighed on demand expectations. API reported that gasoline stocks jumped by 7.2MMbbls while distillates inventories fell by 0.25MMbbls, over the week ending 19 January. The more widely followed EIA report will be released later today. Meanwhile, the geopolitical situation in the Middle East remained uncertain. Qatar delayed LNG shipments to Europe as the ongoing tensions in the Red Sea are slowing shipment deliveries. It has been reported that Qatar has diverted at least six shipments heading to Europe from its regular Red Sea route since 15 January. However, despite the transport challenges, Qatar has not reduced its LNG exports with shipments for the last two weeks estimated to be up 7% compared to the same period last year. The gas market has managed to remain largely unaffected so far with the recent disruptions in the Red Sea. European gas futures continue to trade near six-month lows due to weak industrial demand, availability of alternative LNG supply and higher inventory levels.

What could go wrong? Energy prices could go wrong. Oil bulls finally got the positive breakout that they were looking for in oil prices. The barrel of American crude cleared the $75pb resistance and extended gains past $77pb on muddy geopolitical picture in the Middle East and on the back of a 9-mio barrel slump in US weekly oil inventories. The American crude tested the 200-DMA, near $77.50pb, to the upside but has so far been unable to take it out. Moving forward: Positive momentum is building, the ample supply story has been broadly priced in and if Mid East tensions take over the market narrative, there is no reason to keep the oil bulls contained. The next natural target is the 200-DMA. If broken, oil bulls will challenge the $78.60, the major 38.2% Fibonacci retracement on September to December selloff and a breakout above this level will point at a medium term bullish reversal, and could pave the way for a further rise to the $80pb.