storage

Italy: Confidence data points to a mixed economic outlook June's confidence data paints a mixed picture for Italy's economy, with consumers increasingly upbeat and businesses remaining less optimistic. We're hopeful for continued growth in the second quarter, but expect some softening off the back of weaker net exports.   An upbeat outlook from consumers The most striking element of June's data came from consumers. We had anticipated an improvement there, but not such a drastic development. The breakdown shows a marked improvement in both economic and personal climates which extends to expectation components. On the back of a slowly improving inflation backdrop, we believe the very reason for consumer optimism lies primarily with the resilience of the labour market.   The unemployment expectation component of the survey slowed markedly in June. When matching this with the decline in the current opportunity to save sub-index, we sense that the compression in the Italian saving ratio is still in place, with a possible positive bearing on private consumption.   Manufacturing confidence softens On the business front, confidence unsurprisingly declined again among manufacturers, with the lowest levels recorded since January 2021. Here, the decline in orders coupled with a small increase in inventories led to the fourth decline in a row in the production expectation component. Softer demand in key export destination countries such as Germany is apparently taking its toll – and it doesn't seem as though the domestic component linked to the flow of investment activated by the recovery and resilience of European funds is able to compensate. Interestingly, the consumer goods segment seems less affected.   Construction confidence rebound The only business sector that saw a positive reading was construction. With a three-point rebound, the index is back up close to historical highs, propelled by the residential building component. The tailwind of generous tax incentives for energy-efficient renovations is still at play, suggesting the backlog was so significant that the reduction of the incentives introduced at the beginning of the year has not yet resulted in an obstacle to supply.   Services only softly down, with tourism surprisingly weak The small decline in services confidence resulted from an increase in the transport, storage and communication components, as well as a surprising decline in tourism services. The latter comes after two months of continued strength and has been driven by recent developments in both current affairs and a sharp fall in orders. It also flashes warning signals for the incoming tourism season.   Second quarter set for positive but softening GDP growth All in all, today’s confidence data release suggests that conditions are still there for a positive second quarter. We're hopeful for continued strength in consumption, which proved surprisingly strong in the first quarter. On the investment front, the construction component still appears able to provide some push. Net exports, however, look set to remain a drag on quarterly growth. We aren't expecting another repeat of the first quarter’s 0.6% growth, but should still see a positive reading for the second quarter.

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: LNG supply risks linger Natural gas prices are likely to remain volatile in the coming days, at least until there is some clarity surrounding potential strike action at a number of Australian liquefied natural gas (LNG) facilities.   Energy – OPEC sees deficit over remainder of 2023 Oil prices came under some pressure yesterday with ICE Brent settling a little more than 1.3% lower on the day. This is despite OPEC releasing its monthly oil market report which suggests that the market will continue to tighten for the remainder of the year. OPEC made little in the way of changes to its global oil demand forecasts for the rest of this year and for 2024. However, the group did revise higher its 2023 non-OPEC supply estimates by a little more than 100Mbbls/d on the back of upward revisions to Russian supply. OPEC numbers suggest that demand for OPEC oil over the third quarter will be 29.56MMbbls/d, which is well above the 27.31MMbbls/d that OPEC produced in July. The call on OPEC output grows to 30.74MMbbls/d in the fourth quarter, whilst over 2024, the group’s numbers suggest demand of 30.08MMbbls/d for OPEC oil. Given the current production targets of OPEC+ until 2024, these numbers suggest global oil inventories will draw for the remainder of this year and over 2024. The International Energy Agency (IEA) will publish its latest monthly oil market report later today, where it will share its latest outlook for the market.   The significant cuts that we are currently seeing from OPEC+ continue to be supportive for medium sour crudes. The Brent-Dubai spread remains in negative territory and in fact has traded to a discount of more than US$1.20/bbl – lower than the levels seen during 2020, when OPEC+ made significant cuts. The weakness in Brent relative to Dubai should mean that Atlantic Basin crudes should be more appealing to Asian buyers. It is difficult to see any significant reversal in the spread before Saudi Arabia starts unwinding its additional voluntary supply cuts. Having rallied significantly earlier in the week, following supply risks around Australian LNG, the European gas market gave back some of these gains yesterday, with TTF settling more than 6.6% lower on the day. The European gas market remains in a comfortable situation with storage more than 88% full and it is clear that the region will hit its target of 90% by 1 November, well ahead of schedule. However, the market will still need to keep a close eye on how labour negotiations progress in Australia. The potential for prolonged industrial action at a number of Australian LNG facilities could put a little over 10% of global LNG supply at risk, and given Europe’s growing reliance on LNG, this would (as already seen in recent days) have an impact on European gas prices as Asian buyers compete more aggressively for alternative supply.