supply disruptions

In the ever-evolving landscape of financial markets, decisions made by major central banks have a significant impact on shaping trends. We recently had the opportunity to speak with Matthew Weller, an analyst at StoneX, to gain insights into the current state of affairs.   Read more   The European Central Bank (ECB) recently made headlines with its "Hawkish Hike," raising its key interest rate by 25 basis points to 3.5%. This move aims to combat the escalating inflation in the eurozone, marking the eighth consecutive rate hike since July 2022. The ECB's determination to bring inflation down from its current 6.1% to its target of 2% is evident. ECB President Christine Lagarde has hinted at the possibility of further rate hikes at the next meeting in July, emphasizing the need to tackle inflation head-on. Lagarde made it clear that the ECB has no plans to pause its rate hikes. While the ECB focuses on inflation control, other central banks, such as the US Federal Reserve, have taken a pause in their rate hikes to assess their impact on economic growth and employment. However, the Fed's projections indicate the potential for two more rate hikes this year. Similarly, central banks in Australia and Canada have resumed rate increases after a temporary pause, underscoring the global challenge of high inflation. The ECB's decision to raise rates comes at a time of economic uncertainty, influenced by factors such as the ongoing conflict between Russia and Ukraine and potential wage agreements that may further fuel inflationary pressures. The ECB acknowledges that short-term economic growth may remain subdued, but it expects improvements as inflation subsides and supply disruptions ease. While concerns persist regarding the potential negative impact of higher rates on the economy and the risk of a recession, the ECB remains committed to addressing inflation as a top priority   FXMAG.COM: Could you give as your point of view about how the gold prices would behave in next weeks? Is there a chance that there will be new ATH? Gold Consolidates Amid Hawkish Central Bank Actions   With major central banks continuing to tighten monetary policy and inflation still receding (if more gradually than before) gold prices are likely to remain on the back foot in the near term. As of writing, the yellow metal is trading in the mid-$1900s, where it has spent the last three weeks consolidating. Bulls will be looking for a break above the June high near $1990 to signal a potential retest of the record highs near $2075 as we move into July, whereas a confirmed break below $1930 could open the door for a retest of the 200-day EMA near $1900 next.

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

The Commodities Feed: USD boosts the complex The commodity complex continues to move higher, aided by the weakness seen in the USD since the US CPI release. For oil, supply disruptions have provided a further boost to the market.   Energy – Oil supply disruptions grow Oil continues to move higher thanks to tailwinds from the below consensus CPI report earlier this week along with weakness in the USD. ICE Brent is now trading above US$81/bbl, the highest levels seen since late April. Brent is set for its third consecutive week of gains. It is not just macro factors driving crude at the moment. Chinese trade data for oil was constructive with flows significantly higher year-on-year and also up month-on-month. In addition, there are some renewed supply concerns. Both Libya and Nigeria are seeing disruptions at the moment. In Libya, both the Sharara and El Feel oil fields are in the process of being shut down due to protests spreading in the country. These fields have a combined production capacity of around 370MMbbls/d. Meanwhile in Nigeria, Shell has suspended operations at its Forcados oil terminal due to a possible leak. The terminal was set to ship 220Mbbls/d of crude in July. Combined, these disruptions are significant and will be felt in a market that is already set to tighten. There is also uncertainty over whether we will see reduced appetite for Russian crude oil, given that Urals are now trading above the G7 price cap. Western shipping and insurance services can only be used for crude priced under US$60/bbl. Russia has tried to blunt the impact of the price cap by securing alternative shipping capacity, but only time will tell how successful it has been in doing so. Both the International Energy Agency (IEA) and OPEC released their monthly oil market reports yesterday. The IEA revised lower its demand growth forecasts for 2023 by 220Mbbls/d to 2.2MMbbls/d, which still leaves oil demand this year at record levels. This should also mean that the oil market still tightens up over the second half of 2023. As for 2024, the IEA expects oil demand to grow by 1.1MMbbls/d. OPEC are more bullish on oil demand, revising up their demand growth forecasts for 2023 slightly to 2.44MMbbls/d, whilst for 2024 the group expects oil demand to grow by 2.25MMbbls/d. This is quite aggressive when considering the uncertain macro outlook. In Europe, refined product inventories in the ARA region have declined for the fifth consecutive week, falling by 53kt over the last week to 5.65mt. Gasoline stocks fell by 30kt over the week to 1.34mt, although stocks are still comfortable and well above the 5-year average. However, middle distillates continue to tighten. Jet fuel stocks in ARA fell by 20kt to 730kt, which is the lowest level seen at this stage of the year since 2018. Meanwhile, gasoil inventories fell by 29kt over the week to 1.93mt, which is around 371kt below the 5-year average. These draws continue to offer good support to the gasoil market, with the crack remaining above US$20/bbl whilst the prompt time spread remains in backwardation.

The Commodities Feed: China’s GDP falls short The complex has come under pressure this morning following China’s second quarter GDP data, which came in below market expectations. The data will do little to ease concerns over the Chinese economy.   Energy – China data weighs on oil Oil’s venture above US$80/bbl was relatively short-lived, with Brent settling below this level at the end of last week. Downward pressure has continued during early morning trading today following weaker than expected Chinese GDP data. A slight recovery in the USD has also put some pressure on oil whilst supply concerns have also eased, with both the Sharara and El Feel oil fields in Libya reportedly resuming after a brief shutdown last week due to protests. However, it appears as though loadings at Shell’s Forcados oil terminal in Nigeria remain halted after a possible leak was discovered last week. The terminal was set to ship 220Mbbls/d in July. This follows a number of other recent supply disruptions in the oil market, including Kazakh output being affected by power issues and Mexican output bieing hit by a platform explosion, whilst the market is still awaiting the resumption of Kurdish oil flows via the Ceyhan terminal in Turkey. Speculators increased their net long in ICE Brent over the last reporting week, buying 48,123 lots to leave them with a net long of 233,029 lots as of last Tuesday. This is the largest net long speculators have held since April. However, the current speculative long is likely to be somewhat larger, given that this data will not include the post-US CPI rally. The Commitment of Traders report also shows that producers appear to have taken advantage of the more recent strength by selling into the rally, with the producer gross short increasing by 34,930 lots over the last reporting week. The latest rig count data from Baker Hughes shows that the number of active US oil rigs continues to trend lower. The oil rig count fell by 3 over the last week to 537, which is the fifth consecutive week of declines. The number of active rigs has fallen from a year-to-date peak of 623 in mid-January. Whilst up over the last week, Primary Vision’s frac spread count does suggest that completion activity in the US has plateaued over the last few months. China released its second quarter GDP numbers this morning, which showed that GDP grew 6.3% year-on-year, falling short of market estimates of 7.1%. Even so, quarter-on-quarter GDP numbers came in line with consensus at 0.8%. June industrial production came in above expectations at 4.4% YoY, whilst retail sales in June slowed to 3.1% YoY from 12.7% previously, which was also below expectations of 3.3%. The weaker than expected GDP numbers are likely to continue to cause concern for markets. Digging a little deeper into industrial output numbers shows that apparent domestic oil demand was strong over June, coming in at 14.86MMbbls/d, up 13.6% YoY and 1.4% MoM. However, the oil market clearly seems focused on weak headline numbers.

The Commodities Feed: China macro concerns grow Weak Chinese data yesterday weighed heavily on the commodities complex. However, there was an exception: European and Asian natural gas prices rallied on continued uncertainty over Australian LNG supply.   Energy: Natural gas spikes higher once again The effects of weaker-than-expected Chinese macro data rippled through the commodities complex yesterday, including oil. ICE Brent settled more than 1.5% lower on the day with worries over what this weak data means for the Chinese economy and oil demand. In addition, much stronger-than-expected US retail sales likely led to some questions over whether the US Federal Reserve may still have a bit more to do when it comes to policy tightening.   API data released overnight was more constructive, with US crude oil inventories falling by 6.2MMbbls over the last week, quite a bit more than the roughly 2.5MMbbls draw the market was expecting. In addition, Cushing crude oil inventories fell by 1.03MMbbls, whilst for products, gasoline stocks declined by 761Mbbls and distillate inventories increased by 658Mbbls. The more widely followed EIA weekly report will be released later today. Natural gas prices continue to trade in a volatile manner. TTF settled more than 12% higher yesterday with growing concerns over the risk to Australian LNG. There was no breakthrough in talks yesterday to avoid strike action and so clearly the risk of supply disruptions is growing. We should get more clarity on the situation towards the end of the week. However, the European market is in a very good position. European storage is basically 90% full now, hitting the European Commission’s goal about two and a half months before the target date. It is looking as though European storage will essentially be full before the start of the next heating season and so we would expect to see renewed downward pressure on prices, particularly once there is some clarity around Australia.  

The Commodities Feed: Australian LNG strike risk grows European natural gas prices rallied yesterday as the threat of strike action in the Australian LNG industry grew. This is after unions served a strike notice to Chevron.   Energy – A step closer to Australian LNG strikes European gas prices rallied yesterday with TTF settling more than 10% higher on the day after unions in Australia served a strike notice to Chevron for workers at its Gorgon and Wheatstone LNG operations. Strike action is set to start on 7 September, and the Offshore Alliance has said that action will escalate each week until a deal is finally made. The serving of notice does not guarantee strike action, with both parties set to continue negotiations between now and 7 September. However, clearly, the risk of disruptions at both facilities, which have a combined capacity of 24.5mtpa (around 6% of global LNG supply) is growing. Woodside was able to come to an agreement with unions for workers at its North West Shelf facility last week before a strike notice was served. Supply uncertainty will linger in the gas market, which is likely to continue to support Asian LNG, particularly given that these potential disruptions coincide with when Asian buyers usually step up their buying ahead of the northern hemisphere winter. Middle distillates continue to be well supported with the NYMEX heating oil crack remaining above US$50/bbl, whilst the ICE gasoil crack continues to trade around US$40/bbl. A fire at Marathon’s Garyville refinery in Louisiana at the end of last week has provided further support to products. The refinery has a capacity of 596Mbbls/d, making it the second largest refinery in the US according to the Energy Information Administration. The refinery is currently operating at reduced rates and there is little clarity on when operations will return to normal.

The Commodities Feed: US crude oil inventories drop The oil market edged higher yesterday, though the move was fairly modest when you consider the large draws seen in US crude oil inventories along with growing supply risks in West Africa.   Energy - Large US crude draw The latest EIA numbers show that US commercial crude oil inventories fell by 10.58MMbbls over the last week, which leaves total crude oil inventories at 422.94MMbbls - the lowest level since December 2022. Crude oil inventories at Cushing also saw further declines, falling by 1.5MMbbls, which takes crude oil stocks at the WTI delivery hub to below 30MMbbls and to a level last seen in January. Lower imports and higher exports were largely behind the large draw. As for refined products, gasoline inventories fell by 214Mbbls over the week, whilst distillate fuel oil stocks increased by 1.24MMbbls. This build was despite refiners reducing their run rates over the course of the week. Gasoline demand was stronger over the week, with implied demand increasing by 158Mbbls/d WoW, taking it back above 9MMbbls/d. This might be short-lived, with hurricane activity in Florida this week possibly weighing on demand. Elsewhere, there are growing supply risks after a military coup in Gabon. The West African country is an OPEC member and produces around 200Mbbls/d. While the volumes are relatively small, clearly any disruption in what is already a tight market does not help. However, up until now, there have been no reports of disruptions to the oil supply. In the coming days, the market should receive more clarity on what Saudi Arabia will do with its additional voluntary cut of 1MMbbls/d. This cut was first implemented in July for a month, but the Saudis have rolled it over a couple of times already. Our expectation is that Saudi Arabia will extend this cut through into October. There are clearly still some broader demand concerns and returning this supply to the market could see Brent back below US$80/bbl - something the Saudis would prefer not to see.  

Black Sea grain disruptions & Indian food protectionism It has now been more than a month since Russia decided to pull out of the Black Sea Grain Initiative, which allowed the safe passage of grains from three Ukrainian Black Sea ports. Unsurprisingly, grain markets reacted strongly to the initial news. However, they have since given back all the gains made following the deal's collapse despite Russia attacking grain terminals along the Danube. Ukrainian grain exports under the Black Sea deal were significant and helped both Ukrainian and global markets. However, in addition to exporting from Black Sea ports, Ukraine also increased export volumes from the Danube by rail and road. Therefore, even if we aren't seeing exports under the deal, Ukraine can still export to the world market, although admittedly with smaller volumes. However, what has really provided comfort to grain markets, particularly corn, is that supply growth elsewhere should ensure that global markets are comfortable. Both the US and the EU are expected to see strong growth in corn supply over the 2023/24 season. This means that 2023/24 global ending corn stocks will still increase if we are to lose similar volumes of Ukrainian corn as exported under the grain deal last season. The global wheat market is more vulnerable to supply disruptions, but assuming no significant supply disruptions elsewhere, the market should be able to absorb potential Ukrainian losses. While the reaction of grain markets to the end of the grain deal was short-lived, we are still seeing another round of food protectionist measures taken by some governments. This is most evident in India. Last year, the government banned wheat exports and more recently, it's also restricted some rice exports. There are also suggestions that the government could ban sugar exports over the 2023/24 season, whilst there are reports that the government could also scrap an import duty on wheat. Part of these domestic food security concerns are due to the impact that El Nino is having on the Indian monsoon this season. And the government may also feel it has to take action to ease food prices with an election next year. However, for global markets, these measures risk pushing some agricultural prices higher.  

Metals – Iron ore supply risks Iron ore prices saw some further strength yesterday with the market rallying by a little more than 1.7%, taking it above $121/t. On the demand side, there appears to be a bit more optimism around China. But there are also growing supply risks, namely, potential strike action in Australia. Train drivers at BHP operations in Western Australia voted in favour of taking protected industrial action. The current agreement covers about 500 train drivers carrying iron ore from BHP’s Pilbara mines around Newman to Port Hedland. Hence, any strike action could lead to supply disruptions.

The Commodities Feed: Oil under pressure The oil market came under significant pressure yesterday. Brent traded down to its lowest level since July, while WTI broke below $80/bbl. There are signs that the oil balance is looking less tight and this comes at a time when concerns over supply disruptions from the Middle East ease.   Energy - Brent plummets The oil market came under significant pressure yesterday. ICE Brent settled 4.19% lower on the day and traded to its lowest level since July. Meanwhile, NYMEX WTI settled below US$80/bbl for the first time since August. The market is clearly less concerned about the potential for Middle Eastern supply disruptions and is instead focused on an easing in the balance. Prompt time spreads have weakened, suggesting a less tight physical market. And while there are clear demand concerns hovering over the market, supply dynamics have also played a role. For example, Russian seaborne crude oil exports have grown in recent months, which suggests that Russia is not sticking to its additional voluntary cut. The recent price weakness is likely to lead to growing noise from OPEC+ and in particular from Saudi Arabia. Whilst Saudi Arabia and Russia confirmed that they would continue with their additional voluntary cuts through until the year-end, it is increasingly likely that they will extend this into the new year if this downward pressure continues. The Saudis would like to keep Brent above US$80/bbl, as this is roughly where their fiscal breakeven price is. Our oil balance shows that the market will be in surplus in 1Q24, so further cuts are something we could certainly see. The weakness seen yesterday is likely to continue today. The API released inventory numbers overnight which were bearish. US crude oil inventories increased by 11.9MMbbls over the last week, while Cushing crude oil stocks grew by 1.1MMbbls. For refined products, gasoline inventories fell by 400Mbbls and distillate fuel oil stocks increased by 1MMbbls. The more widely followed EIA inventory report will be released later today. In the EIA’s latest Short-Term Energy Outlook, there was little change to US crude oil production estimates. US crude oil output is expected to average 12.9MMbbls/d this year, up 1MMbbls/d YoY, while supply growth is expected to be much more modest next year, increasing by less than 250Mbbls/d to average 13.15MMbbls/d Chinese October trade data released yesterday showed a fall in the trade surplus last month with weaker exports. However, imports were stronger, including crude oil. Crude oil imports averaged 11.58MMbbls/d in the month, up 3.7% MoM and 13.5% higher YoY. This leaves cumulative imports for the year at 11.41MMbbls/d, up 14.4% YoY. Stronger imports over the course of this year may reflect a recovery in domestic demand, while there will also be a fair amount of stock building.  

Agriculture– Coffee quality premium shrinks The spread between Robusta and higher-quality Arabica coffee tightened to around US¢40/lb yesterday as Robusta prices soared to new highs – the premium reached a recent high of around US¢80/lb in December 2023. Robusta coffee’s active contract jumped to an all-time high of US$3,250/t yesterday at one point as supply disruptions from Vietnam and Brazil added to the supply tightness. The soaring prices have pushed farmers to hold onto the existing inventory in hopes of even higher prices, creating supply-demand imbalances. Moreover, the ongoing conflict around the Red Sea route makes it more challenging for Vietnamese coffee to reach the US and Europe.