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Energy

Non-energy prices only have so much more to fall

Most commodity prices fell this week as demand concerns picked up due to ongoing monetary policy tightening by major central banks. Speaking to the US Senate Banking Committee on Wednesday, Federal Reserve Chair Jerome Powell underlined his “strong commitment” to bringing current multi-decade high inflation back to target. A notable exception to this trend, however, was a rise in natural gas prices in Europe and Asia owing to fears that Russia could potentially further cut gas supply to Europe. If demand concerns intensify, further falls in commodity prices could be in store. However, we don’t think there is a great deal of room for prices to fall in the near term for a couple of reasons. First, energy prices will remain historically high due to supply constraints, putting a floor under other commodity prices. Second, stocks of many commodities, particularly industrial metals, are low, which will further underpin prices. And finally, China’s economy should recover somewhat in the second half of this year. Looking ahead, G7 leaders begin a three-day meeting on Sunday, during which they will discuss sanctions against Russia and how to support the long-term reconstruction of Ukraine. Any new sanctions coming out of that meeting could affect commodity prices. Data-wise, the EIA should get back to releasing weekly oil inventory data next Wednesday, after missing this week’s release due to technical reasons.

24 June 2022

OPEC+ to change tack from September

Whilst OPEC+ has been failing to meet its production quotas in recent months, it will technically finish unwinding its pandemic-related supply cuts come September. We think OPEC+ will then move to a more liberal approach and allow the few members with spare capacity to produce more. This is one reason why we forecast that the Brent oil price will ease back to around $100 per barrel by year end. In view of the wider interest, we are also sending this Energy Update to clients of our Middle East and North Africa service.

23 June 2022

OPEC+ policy, Egypt’s orthodox shift and FY22/23 budget

Next Thursday's OPEC+ meeting may drop some hints about the future for the group's oil output beyond September and we think that quotas are likely to be lifted. If that’s the case, the Gulf economies would be major beneficiaries. Elsewhere, comments from Egypt’s finance minister suggest that officials are becoming more receptive to a weaker pound, adding to hopes that the move to a more flexible exchange rate is the real deal. A weak currency is a concern given the growing sovereign FX debt burden, but the country’s FY2022/23 budget passed this week does at least highlight a commitment to fiscal austerity.

23 June 2022
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Supply concerns to dominate in gas markets

European natural gas prices surged this week on renewed supply concerns, as Russia once again cut gas supplies to Europe and the US Freeport LNG export facility closed for six months. The huge price move emphasises how volatile natural gas prices can be, particularly in the current environment when global supplies are tight. High volatility is likely to persist as news on gas flows develops but we’re forecasting the European natural gas price to remain high, ending the year at €120 per MWh. Meanwhile, the financial market backdrop has become less favourable for commodity prices. Global monetary tightening and concerns about global growth have hit risky assets like equities and non-energy commodities this week. Genuine supply concerns are keeping prices of certain commodities elevated, but there is the potential for large price falls if some of these fears ease or prove unfounded. Next week, we don’t think there is much chance of a cut to China’s Loan Prime Rate, to be announced on Monday and the published agenda for the National People’s Congress Standing Committee doesn’t indicate that any extra financing for fiscal support will be discussed. Without significant stimulus, we think that soft demand from China will weigh on industrial metals prices this year.

Hawkish Fed adds to growing external risks

The 75bp interest rate hike by the US Fed this week and expectations for further large hikes in the coming months will have ripple effects across the region. It is likely that Hungary's central bank will be forced to raise rates to defend the forint again and we now expect the Turkish lira to end the year at 24/$. Elsewhere, the risk that gas flows from Russia to Europe are cut off has increased. The gas deal agreed between the EU, Egypt and Israel this week will boost Israel's exports, but it's likely to take many years before Israel becomes a major gas exporter. World with Higher Rates - Drop-In (21st June, 10:00 ET/15:00 BST): Does monetary policy tightening automatically mean recession? Are EMs vulnerable? How will financial market returns be affected? Join our special 20-minute briefing to find out what higher rates mean for macro and markets. Register now

Europe’s gas supply looking increasingly fragile

Russia’s decision to once again cut supplies to Europe makes the region’s gas supply look increasingly precarious. The move will slow regional stock builds and keep prices historically high.

Fed hikes, Egypt’s policymaking, Egypt-Israel-EU gas deal

Central banks in the Gulf followed the Fed in hiking interest rates and further tightening lies in store. But there are reasons to think that the region’s economies will be relatively unscathed by this. The likes of Tunisia and Egypt are more much more vulnerable to global monetary tightening. That said, after devaluing the pound in March, Egyptian policymakers seem to have moved to a more flexible exchange rate regime that will help to absorb strains in the balance of payments. Meanwhile, the EU signed a tripartite gas deal with Egypt and Israel this week that should provide a boost to Egypt’s energy sector over the coming years. World with Higher Rates - Drop-In (21st June, 10:00 ET/15:00 BST): Does monetary policy tightening automatically mean recession? Are EMs vulnerable? How will financial market returns be affected? Join our special 20-minute briefing to find out what higher rates mean for macro and markets. Register now

US Weekly Petroleum Status Report

Commercial crude stocks rose again this week, following another unusually large release from the strategic reserve. Meanwhile, implied product demand fell back as petroleum product prices remain very high. We’re expecting demand to remain seasonally soft in the coming months.

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