The Commodities Feed

The Commodities Feed: The need for a risk premium The oil market has opened slightly stronger this morning and this is no surprise given recent developments in Russia. However, the failed move by the Wagner group suggests that any upside in prices will likely be limited.   Energy - Russia instability offers limited upside to oil It was shaping up to be an interesting opening for oil given developments in Russia towards the end of last week. However, the Wagner group's insurrection came to an end as quickly as it started thanks to a deal brokered by Belarus’ Lukashenko. As a result, oil has only seen limited gains so far in early morning trading today with ICE Brent up a little over 1%. While the immediate supply risks have disappeared, the market will likely have to start pricing in a larger risk premium for oil given the growing instability in Russia. How much of a risk premium will really depend on how the aftermath of the failed insurrection is dealt with. In the US, the oil rig count has continued to trend lower. The number of active oil rigs has fallen by 6 over the last week to 546, which is the lowest level seen since April last year. The rig count has fallen by 77 since mid-January and the slowdown in drilling activity will call into question how much supply growth we will see from the US. Falling drilling activity in the US will be welcome by OPEC+ members, as in theory, it should make their output policy more effective, though demand has been a big concern for the market which has more than offset the recent cuts seen from OPEC+ members.   The latest positioning data shows that speculators increased their net long in ICE Brent by 16,116 lots over the last reporting week to 190,386 lots. This move was predominantly driven by fresh buying with the gross long increasing by 12,996 lots. However, given the price action seen since the last reporting week, we are likely to have seen some of these longs liquidate already. The net speculative long in ICE gasoil increased by 12,250 lots to 16,191 lots over the week. This was largely driven by short covering. The gross short declined by 10,319 lots over the period.  Refinery outages have been supportive for middle distillates in recent weeks and if these outages continue, there is room for further short covering.   There is very little on the agenda for energy markets this week with the exception of the regular weekly releases.

The Commodities Feed: More positive US data Oil edged higher yesterday following some good US macro data. However, this data also increases the likelihood of further rate hikes. And the expectation of further hikes will ultimately provide resistance to commodity prices moving significantly higher.   Energy - ARA gasoil inventories fall further The oil market managed to edge higher yesterday with ICE Brent settling a little more than 0.4% higher on the day. This follows first-quarter US GDP being revised significantly higher, while jobless claims also fell over the week. However, stronger-than-expected US macro data also increases the likelihood of further rate hikes from the Fed.  Growing expectations of further hikes is one of the factors which is capping the upside in the market, while on the downside, the belief that OPEC+ will take further action if there is significant further weakness provides a floor to the market. As a result, the oil market continues to trade in a fairly rangebound manner. The latest data from Insights Global shows that gasoil inventories in the ARA region fell by 35kt over the last week to 2mt. This is the lowest that gasoil inventories have been in the region since December and stocks are now around 300kt below the 5-year average for this time of year. It is this tightening which continues to provide support to middle distillates with the ICE gasoil crack continuing to trade around the US$20/bbl level. Refinery outages have contributed to the tightening, but a return of these refiners, the ramping up of new capacity over 2H23 and demand concerns suggest that further upside is likely limited. China will be releasing PMI data today. The manufacturing PMI has been in contraction territory for the last two months and the expectation is that we will see yet another contraction over June. A weak set of data will not be great for commodities, particularly for the metals complex. Other releases on the calendar for today include the Baker Hughes US rig count data. And if the trend seen for the last several months holds, we will likely see a further slowdown in US drilling activity. In addition, the CFTC and ICE will be releasing their latest Commitment of Traders reports. Price action over the last reporting week suggests that speculators should have reduced their net long position in ICE Brent.

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.