Oil and natural gas prices surged yesterday as supply side reality clashed with recessionary demand side fears, suggests Phil Flynn of PRICE Futures Group.
After Russia’s Gazprom told customers in Europe it cannot guarantee gas supplies because of “extraordinary” circumstances, Europe started to prepare for the possibility that Russian gas might be cut off forever. Europe is experiencing a heat wave and that along with Russia weaponizing its gas supply has forced the market to price in the possibility that Europe will have to scramble for alternative fuels to stay warm this winter.
This comes at a time when the ECB is signaling that they will raise interest rates by 50 basis points to cool down rampant inflation.
The oil market is looking at that rumor of a more aggressive interest rate increase in Europe as both bearish and bullish for oil. The euro currency that had recently gone parity with the dollar it’s now showing strength. A stronger euro versus the dollar normally means stronger oil prices yet the oil is tempering that currency-related enthusiasm because they are starting to wonder how Europe can handle a 50 basis point interest rate increase at a time when energy prices could be surging and will be surging to record highs.
The FT reports that Russian action to stop delivering gas to Europe is expected to cause contractions of more than 5% in the Czech Republic, Hungary, Slovakia, and Italy during the following year.
US Treasury Secretary Janet Yellen continues to bemoan that Russia has weaponized economic integration to a tremendous effect. The Treasury Secretary continues to try to work on a proposed cap on Russian oil prices that almost every expert says will only force Putin to cut off supplies if he doesn’t like the price. Energy shortages could put lives at risk so it’s probably the perfect time for Biden to declare a climate emergency. Reuters reports that “Biden is considering declaring a national climate emergency as soon as this week, The Washington Post newspaper said on Tuesday, citing sources. The move came after two US Senate Democrats urged Biden to declare a climate emergency and use the Defense Production Act to ramp up production of a wide range of renewable energy products and systems, including solar panels.
The other demand-side concern for oil is China. They are continuing to have a problem with Covid-19 and there have been more lockdowns. The Wall Street Journal reported, “Two of China’s biggest cities ordered residents to undergo mass Covid-19 tests this week, highlighting the risk that fresh outbreaks could trigger new and economically costly lockdowns. Authorities in Tianjin, a northeastern metropolis of more than 13 million people, ordered citywide tests on residents to screen for coronavirus infections starting Monday evening, after reporting two new cases earlier in the day. These were the first locally transmitted infections detected in more than a week in the home to the biggest port in northern China and the main maritime gateway to Beijing.
Shanghai’s government said it would require residents across nine districts and other administrative zones to take two Covid-19 tests over three days from Tuesday. Local officials cited continued risks of the virus spreading outside known transmission chains, although reported locally transmitted infections fell to 17 cases on Sunday from a daily average of about 50 in the past week.
We’ve also had a view of oil inventories which should increase again this week. We are calling for an increase of 2,000,000 barrels in crude supply, gasoline supply, and distillate. Traders are also going to be focused on gasoline demand which seemingly plunged last week. The combination of U.S. refiners producing over 10 million barrels of gasoline a day along with dropping demand helped cause a break in retail prices. Will it last! Tune in for the API report tonight.
We still think natural gas has an upside risk as well. It will be very volatile but the hot temperatures here in the US, along with production issues and the possibility that at some point in the future the Freeport LNG terminal might reopen, is going to give the market some long-term support. Make sure that you get hedged up going into this winter.
Learn more about Phil Flynn by visiting Price Futures Group.