Energy
The oil market continues to be driven by external influences, reflecting the lack of fresh fundamental catalysts. Oil prices have resumed their sell-off in early morning trading today. A more aggressive approach from the US Fed, in order to try rein in inflation has not helped, with it likely to prove challenging for the Fed to bring inflation down without a hard landing.
Oil fundamentals remain constructive with the oil market expected to continue to tighten through the year as the EU’s ban on Russian seaborne crude starts to increasingly bite. Although, how tight the market will be really depends on how willing the likes of China and India are to pick up heavily discounted Russian crude. Chinese May trade data suggests there is a strong desire, with China importing a record amount of Russian crude over the month.
Another dynamic in the market which makes it difficult to be overly bearish is the tightness in the refined products market. Whether it is the US or NW Europe, refined product inventories are at or near multi-year lows. This continues to push refinery margins higher. And stronger margins for refiners should equate to stronger crude oil demand from these refiners.
Reduced Russian gas flows via the Nord Stream pipeline is being felt in other markets and regions. Spot Asian LNG has rallied by around 60% over the last week or so on the back of lower pipeline flows to Europe. In addition, the prolonged Freeport LNG outage will only tighten what is already a tight LNG market. Whilst, weak Chinese LNG demand over 1H22 offered some relief to the LNG market, we will need to see if this trend continues in 2H22- much will depend on whether we see the latter part of the year plagued with Chinese lockdowns. Coal has also benefitted from reduced Russian gas flows, with a number of EU countries including increased coal usage as part of measures to counter gas shortages. API2 prices are up around 29% over the week, whilst Newcastle has rallied by around 20% over the period. The issue fore EU buyers is that they will have to look further afield for thermal coal, given the ban on Russian coal.
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