The Commodities Feed: Brent Breaks Above $80, Energy Market Dynamics and Trade Data Analysis

The Commodities Feed: Brent breaks above $80

A below-consensus US CPI release has provided a boost to the commodities complex, with it weighing on the USD and leading to a rethink on how much more hiking there is to come from the Federal Reserve. For oil markets, attention will be on today’s IEA and OPEC monthly reports.

 

Energy: Urals trading above price cap

The oil market continued its move higher yesterday, which saw ICE Brent not only break above US$80/bbl, but settle above this level. As a result, Brent has finally broken out of the range it has spent almost two months trading in. The key catalyst for the move was US CPI data coming in below consensus. And while the data is unlikely to change expectations for the Fed to hike at its next meeting, it does call into question the need for further tightening after the July meeting. While the fundamentals continue to support the view that oil prices should trend higher over the remainder of the year, there are still clear macro concerns in the market. In addition, in the very short term, the 200-day moving average is likely to provide some strong resistance to the market.

According to Argus, Russian Urals are now trading slightly above the US$60/bbl G7 price cap for shipments from Black Sea ports. Western insurance and shipping services can only be used for Russian crude priced under the cap. Obviously, there is nothing stopping this crude oil from moving with the use of alternative ships and insurance. And the fact that Russia has managed to secure a large amount of non-western shipping capacity does make the price cap less effective. If Urals remain above the cap for a sustained period, it will be interesting to see if it eventually has any impact on Russian export volumes.

The latest trade data from China this morning shows that crude oil imports averaged 12.67MMbbls/d over June, up 4% month-on-month and 45% higher year-on-year. Obviously imports were under pressure last year due to Covid related lockdowns. Meanwhile year-to-date crude imports are up 11.7% YoY.

Yesterday’s EIA report saw some big inventory builds in crude and products. Commercial US crude oil inventories increased by 5.95MMbbls over the last week, which was quite a lot more than the 3MMbbls increase reported by the API the previous day. The crude build was largely driven by lower exports with crude oil exports falling by 1.76MMbbls/d week-on-week to 2.14MMbbls/d, which is the lowest weekly export number since January. On the product side, distillate fuel oil inventories increased by 4.82MMbbls, whilst there was little change in gasoline stocks. Meanwhile, refinery run rates increased by 2.6pp over the week to 93.7%. Overall, the report was on the bearish side, given the large builds and weaker implied demand. However, clearly the market was more focused on US CPI data yesterday.

Both the IEA and OPEC will be releasing their monthly oil market reports today, which will include their latest outlook for the oil market. Despite broader macro concerns, last month the IEA remained constructive on the demand picture, with the agency forecasting oil demand to grow by 2.4MMbbls/d in 2023. However, the agency believes the macro picture will provide more headwinds for demand in 2024, with demand estimated to grow by 860Mbbls/d next year.

European natural gas prices continue to come under pressure. TTF settled more than 8% lower yesterday and front month prices have traded down to their lowest levels in more than a month. Norwegian gas flows continue to edge higher from the lows seen in late May and over much of June (due to maintenance), whilst European storage is more than 80% full at the moment, well above the average of 65% for this time of year. Prices are likely to remain under pressure through the summer with storage expected to be full well ahead of the heating season. The Asian market is more profitable for LNG, with Asian spot LNG prices trading at its largest premium to TTF since January- more than US$3/MMBtu.