The Commodities Feed: Supply risks vs demand concerns

Commodity markets largely shrugged off developments in Russia over the weekend, with the focus now back on China demand concerns and the US Federal Reserve.

Energy – Rangebound crude

Energy markets largely shrugged off events over the weekend in Russia. Oil opened strongly yesterday, but gave back a lot of these gains as the day progressed. As a result, ICE Brent settled just 0.45% higher on the day. The more hawkish tone from the US Fed appears to be capping oil prices and the broader commodities complex, while there remain broader concerns over China’s economic recovery. Up until now, oil demand indicators for China have been good, with stronger crude oil imports and higher apparent domestic demand. The concern is whether this can continue as there are clearly still some weak spots within the Chinese economy – specifically with industrial production and the property sector.

For the oil market, there is little on the calendar for today. ICE Brent August options expire today, which will be followed by the August futures expiring on Friday. The latest open interest data (which is up until Friday) shows that there is still open interest of more than 17k lots at the $75 strike for August call options. Meanwhile, we will also get US inventory numbers from the American Petroleum Institute (API) later in the day.

The European natural gas market had a volatile trading session yesterday with TTF trading in a range of EUR5.40/MWh over the day. Obviously, there would have been concerns over the remaining Russian pipeline flows to Europe following developments in Russia over the weekend. However, fundamentals for the European gas market are still bearish in the short term.

EU gas storage continues to fill up and is now more than 76% full, well above the 57% seen at the same stage last year and also higher than the five-year average of 60%. In the absence of any significant supply shocks, EU gas storage will hit the European Commission’s target of 90% full well before 1 November. This suggests that later in the summer we could see further pressure on prices and a deeper contango along the forward curve – there is already an almost €20/MWh contango between the August 2023 and December 2023 TTF contract.