Demand outstripping supply drives oil price action

Commodities

Supply and demand is such a simple concept – but it’s one that continues to have the biggest influence on current oil prices.

Oil trading

Another strong opening for crude oil

At the start of the week, the WTI and Brent Crude benchmark were trading at strong levels. This has been the case for some time now, so it’s not surprising to see, but for oil bulls it will no doubt be encouraging.

WTI, for example, was trading for $85.59 at its highest on Monday. It has subsequently fallen back to $83.65 on Tuesday morning, but still an overall strong position for West Texas Intermediate.

Brent has been a little more subdued but is still in a good place. The North Sea benchmark reached an on-the-day high of $85.76 on Monday. As of Tuesday, Brent futures were trading for around $85.08.

What’s driving price action this week? It’s the same old story: supply and demand.

Demand appears to still be in front of demand.

For example, supplies at the Cushing, Oklahoma depot are at three-year lows, suggesting higher throughput and less stockpiling.

US commercial inventories decreased by 0.4m bpd according to the EIA stockpile report for the week ending October 15th. They are now 6% lower than the five-year average in total.

Gauging the crude oil demand outlook vs supplies

We’ve seen much agitating from the Biden White House to try and get OPEC and allies to bring more crude to market.

Saudi Arabia, the current OPEC+ head honcho, is steadfastly refusing to do so. The world’s top oil producer is comfortable with the output levels it and its allies have agreed: an extra 400,00 bpd each month from now until April 2022.

But demand keeps on rising. The current energy crunch and possible heating switch from gas to oil is driving up forecasts. It’s estimated the global daily average could rise anywhere between 500,000 to 750,000 bpd heading into winter.

This is the basic price supporter going forward. There has been much talk of oil prices recently. Can they reach over $100? It’s a big question. Some ultra-bullish options traders are going even further, pricing in $200 per barrel oil prices by the end of December 2021.

That seems a little excessive to this reporter but there’s no doubt that oil prices are in a strong position right now.

However, there is also COVID-19 to contend with. The pandemic is by no means over. Rising cases in key crude importers could put pay to further travel and demand recovery. If the world needs to enter a second lockdown, how will oil demand cope? If that were the case, then it’s likely prices would slump.

Where next for oil? No rally lasts forever. It’s an immutable law of physics that what goes up, must come down. But while that’s talking about gravity, the weight of supply/demand could bring oil back down to Earth. Essentially, price action is all pegged to COVID-19 cases as it has been for the past nearly two years.

For now, however, oil continues to build on high demand and restricted supplies.

Where can oil go from here?

Commodities

With crude oil prices strengthening, markets are asking just how high oil can climb right now.

Oil trading

Crude starts the week on a strong footing

Two key oil benchmarks began this week in a strong position.

WTI was flitting between $81.50 to $82.28 between Monday and Tuesday, even reaching $83.17 on Monday.

Brent is closing in on all-time highs. Trading at around $84.80 at the time of writing, its only a couple of percentage points away from its October 2018 high of $86.

All good news if you’re an oil bear.

So, what’s supporting prices this week? It’s the old supply and demand struggle.

Saudi Arabia helped stoke the fires a little with its refusal to open the OPEC+ taps further. The kingdom and OPEC chief said last week it and the cartel were committed to their monthly production boosts.

Each month until at least April next year, OPEC members will be collectively upping production by 400,000 bpd.

Rapidly rising natural gas and coal prices could also benefit oil. As winter rolls in, and temperatures drop, the high costs from those two commodities could necessitate a switch to oil heating. Crude oil’s already a high-demand product as it is. Supplies are also being kept tight, at least from OPEC+.

The conditions are there for a sustained rally – but we have to be careful of market exhaustion. Support levels identified for WTI and Brent have been variously stated at $75 and $80 respectively by oil analysts.

But some market observers are much more optimistic…

Billionaire businessman suggests $100 oil price is on the way

United Refining Company Chief Executive John Catsimatidis has said he believes crude oil can hit $100 this year.

“With oil nearly at $84 this morning, we are going to see $100 oil, it looks like, there’s no sign of it stopping,” Catsimatidis said in an interview with Fox Business on Monday.

The billionaire cited inflation and rising energy costs across the board as reasons why crude might break the $100 barrier.

Catsimatidis’ comments mirror those of another big oil player: Russian President Vladimir Putin.

When quizzed by a CNBC journalist during the Russian Energy Week summit last Wednesday, Russia’s leader said $100 is “quite possible”.

However, Putin toed a cautious line saying: “Russia and our partners and OPEC + group, I would say we are doing everything possible to make sure the oil market stabilizes.

“We are trying not to allow any shock peaks in prices. We certainly do not want to have that — it is not in our interests.”

It kind of is in Russia’s interest to have a high oil price. 40% of government revenue stem from hydrocarbons, but right now it appears Russia is more concerned with playing.

More US shale oil on the way?

Shale oil could spoil OPEC+’s party.

More US rigs in the Permian Basin are coming online. As it stands, the rig count is 136 rigs higher in this prime shale geography than this time last year.

Analysts believe Permian infrastructure could end up pumping out 4.9m bpd of crude by early 2022. Some are even expecting it to hit this number this month.

OPEC estimates suggest the US will add 800,000 bpd to production via shale sources next year. The EIA figure is roughly 700,000 bpd. Plenty of black gold to help calm the Biden White House’s supply jitters.

Biden and co. have been calling for OPEC and oil producers to step up their production as gasoline prices rise in the US. However, OPEC is not budging as mentioned above. I mean, if you do insist on outfitting regular cars with thirsty V8 motors, you will pay the gasoline cost. Did America not learn anything from the 70s energy crisis?

US drillers are being advised not to chase high oil prices though at the risk of drilling themselves into oblivion.

Looking at storage US commercial inventories rose 6.1m bpd according to the EIA stockpile report for the week ending October 8th. At 427.0 million barrels, U.S. crude oil inventories are about 6% below the five year average for this time of year.

Can crude oil prices make it to the triple digits this year?

Commodities

Oil prices are mounting a strong upward charge as the natural gas crisis rolls on. The question is how far can oil go?

Oil trading

A combination of factors sent oil prices skyward over the weekend. It essentially boils down to the state of inventories, supplies being kept in check, and demand recovering from the summer’s Delta variant COVID-19 wave.

Then you can factor in the global natural gas shortage. A big part of the support crude prices are getting comes from the gas crisis in the form of fuel-switching – or at least the idea of increased fuel switching.

Oil bulls believe that Europe and Asia could pick up more oil for their power demands this winter to compensate for tighter gas supplies. More oil use = more oil demand = oil prices.

“An acceleration in gas-to-oil switching could boost crude oil demand used to generate power this coming northern hemisphere winter,” ANZ commodities analysts said in a note published earlier in the week.

If this does occur, despite Russian President Putin saying he would step in and increase gas supplies to Europe, then fuel switching could be the catalyst that sends oil prices into three-figure territory.

However, JPMorgan analysts have said they’ve yet to see any evidence of a major oil-to-gas fuel change just yet.

A note from the investment bank said: “This means that our estimate of 750,000 barrels per day of gas-to-oil switching demand under normal winter conditions could be significantly overstated.”

So, under present circumstances, the market appears to be pricing in this shift, but it might not actually occur.

Crude prices were on a strong footing at the start of the week. As of Tuesday morning, WTI futures were trading for around $80.5.

Brent crude futures are exchanging hands for $83.83.

There was talk last week that the US would be dipping into its strategic reserve, which did cause prices to wobble. However, the Department of Energy has walked back on these claims. If anything, US inventories are going up.

Oil & gas infrastructure in the Gulf of Mexico, previously closed due to Hurricane Ida passing by, is back online. Rig counts are rising week-on-week. That means more US-sourced crude is being pumped into its domestic stockpiles. As such, there is no need to tap the nation’s strategic reserves just yet.

Crude inventories rose by 2.3 million barrels in the week to October 1st to 420.9 million barrels. Analysts were expecting a 418,000 drawdown.

Natural gas trading

The ongoing gas crisis was creating plenty of upside risk at the start of the week. However, it looks like traders were looking at improving US natural gas supplies for this week’s price action.

Warmer temperatures are playing heavily into the US 15-day weather outlook. Cold temperatures are departing from much of the US, and while unseasonable warmth is good for those who want to go out and about, it’s not so great for price action.

October demand could fall to its lowest for over forty years based on prevailing weather forecasts. It’s possible that the demand picture could extend into November too.

However, warm weather will help the injection situation.

The Energy Information Administration (EIA) reported last Thursday that domestic supplies of natural gas rose by 118 billion cubic feet (Bcf) for the week ended October 1st.

S&P Global Platts analysts were expecting a smaller 111 Bcf rise.

There is some way to go before stockpiles are in line with seasonal norms. Total stocks now stand at 3.288 trillion cubic feet (Tcf), down 532 Bcf from a year ago and 176 Bcf below the five-year average.

In terms of price action, Henry Hub futures were trading at $5.79 on Monday morning and looked like they were ready to challenge $5.80.

Prices pulled back to $5.40 across the Monday session leaving. They dropped further, roughly 2%, to $5.20, so last week’s major rally appears to be petering out. Where they go now seems tied in with US weather patterns. There’s still a gas shortage but as mentioned above, the focus is on what’s happening in the USA instead of Europe and Asia.

Oil surges to seven-year high on OPEC+ decision

Commodities

OPEC and allies commit to production increases sending prices on a strong upward trajectory.

Oil trading

The week’s big news is the oil price boost afforded by OPEC+’s output increase.

The cartel and its allies met virtually on Monday to discuss the state of play for its production volumes. It unanimously decided to stick with increasing output by 400,000 bpd in line with its tapering plans.

There had been some talk of OPEC+ pushing for an 800,000 bpd increase in November, with no increase to follow in December. That isn’t the case. There is a tricky tightrope to walk for the cartel regarding supply and demand, after all.

Oil jumped on news that more OPEC+ output is coming. WTI, for instance, is trading at seven-year highs with futures at $77.87 and spots at $77.70.

Brent broke above $80 on the news. At the time of writing, Brent crude futures had reached $81.69, gaining 0.48% on the day. Brent spots showed similar on-the-day growth and were trading for $81.47.

On the one hand, OPEC+ has acted to protect prices. Another argument is that there is actually not enough room to grow production further at this stage. While Saudi Arabia and the UAE have increased their export volumes by 1.9m bpd 2021, for instance, other OPEC+ members have actually seen theirs drop.

US President Joe Biden was keen for OPEC+ to expand production even further. Roughly 30m bpd of production has been affected by Hurricane Ida. While the reopening of US shale infrastructure in the Gulf of Mexico is underway, Biden was hoping OPEC+ could plug the gap.

That’s clearly not the case here. Instead, OPEC+ is treading the same cautious path it has been walking for the length of the pandemic.

Baker Hughes reported a rise in rig counts for the fourth consecutive week on Friday. Rigs rose by 7 to 528 in the week ending October 1st – the highest level since April 2020. Many Hurricane Ida-hit facilities are starting to come back online, hence the increase.

Looking to US inventories, we saw a major increase EIA figures in the week ending September 24th. US commercial crude oil inventories increased by 4.6 million barrels from the previous week.

At 418.5 million barrels, US crude oil inventories are about 7% below the five-year average for this time of year.

Natural gas trading

Natural gas dropped on Friday, but as of Monday had started to make strong gains again. At the time of writing, Henry Hub futures were up 4.11%, trading at around $5.77.

The march towards $6.00 is back on.

Supply constraints remain in Europe and the UK and China is apparently hellbent on sucking up every last ounce of LNG it can get its hands on. Even Russia has begun tightening levels heading to Europe. It’s going to be a tricky couple of months in terms of supplies.

Bad for consumers? Most likely. Good for bullish traders? Possibly.

Last week’s EIA storage report triggered a broader sell off with traders feeling bearish.

Working gas in storage was 3,170 Bcf as of Friday, September 24th, 2021, according to EIA estimates. This represents a net increase of 88 Bcf from the previous week. Stocks were 575 Bcf less than last year at this time, and 213 Bcf below the five-year average of 3,383 Bcf.

Price action towards the end of last week indicated the presence of strong short-term sellers.

Looking to weather, in the short-term, US national demand is trending towards very low levels, according to Natural Gas Weather.

The weather service said “A messy pattern continues as numerous weather systems again impact the US this week. One system is over the Northwest, a second tracking into the Southwest mid-week, and a third extending from the Great Lakes to the South and Southeast.”

There are reports of tropical storms and hurricanes swirling over the Atlantic. Should we be looking at another Hurricane Ida, then US infrastructure could be about to take another big hit. Supplies would get even tighter.

Oil & gas stage major surge

Commodities

Crude oil and natural gas are off to a flying start this week with market conditions perfectly aligning to create strong price action.

Oil trading

It’s been an exceptionally good couple of days for oil prices.

The key WTI and Brent Crude benchmarks are heading in one direction as they carry on the momentum built up over the weekend.

As of Tuesday, WTI had passed $76.33, making 1.1% on the day, and continues on its upward trajectory.

Much can be said of Brent. The North Sea benchmark is aiming to break the $80 level. At the time of writing, Brent futures were trading for around $79.47 after making 1.15%.

Why the rally and why now? It’s a combination of tighter global supplies, trader confidence, and strong American Petroleum Institute (API) numbers. The three together have created a perfect price storm, hence the strong price action we’re currently seeing.

Firstly, it looks like energy markets are the place to be right now for traders. They appear to be pushing these new highs and are confident in the market’s overall strength.

The API’s inventories report from last week helped underpin this market confidence too. The US has long been a bellwether for oil demand – it is the world’s largest consumer after all – which makes numbers from the API or EIA particularly useful.

The API reported a 6.108m barrel drawdown for the week ending September 17th. Market estimates forecasted a decline of 2.4m.

As the US economy opens up, energy-intensive industries are starting to roar back to life, hence the higher-than-expected drawdown. It’s much the same story in developed economies worldwide as they look to return to post-pandemic normality.

As winter heating season approaches, and supplies tighten, we’re possibly going to see oil prices remain strong as temperatures drop.

Goldman Sachs is feeling particularly confident, having revised its year-end price targets up to $87 for WTI and $90 for Brent.

Goldman said: “While we have long held a bullish oil view, the current global oil supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast and with global supply remaining short of our below consensus forecasts.

“The current oil supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast and with global supply remaining short of our below consensus forecasts.”

Price action is still very much a tightrope act. With the news that US Shale is ready to start drilling, and could add up to 800,000 bpd to supplies, the supply/demand balance could be upset.

Natural gas trading

If you thought crude oil was in a strong position, wait until you see natural gas.

Natural gas prices rose sharply on Monday to reach close to yearly highs at $5.30 before soaring to an unprecedented $6.13 on Tuesday morning.

A squeeze on supply caused by Hurricane Ida is offering support in the US. A large chunk of Gulf of Mexico and Southern US infrastructure is still closed for repairs or maintenance, lowering supply levels, after being hit by Ida earlier in September.

Let’s be clear: this is a global phenomenon. Simply put, there isn’t enough natural gas currently to satiate demand.

Prices of utility gas are skyrocketing in the US, EU, and UK as well as in Asia where demand is intensifying.

Switching back to the US, we should be in the midst of a sustained inventory build-up. It’s injection season – the period where more gas is squirrelled away in anticipation of high winter demand. However, it appears that

The latest Energy Information Administration (EIA) data showed a build-up of 76 billion cubic feet (Bcf) for the week ended September 17th. This was higher than the expected 70 BCf – but stocks remain some 598 Bcf lower than this time last year.

Looking at short-term weather-driven demand, Natural Gas Weather reports: “National demand will remain light this week as highs of 60s to 80s rules most of the U.S. and with very little coverage of highs into the 90s. Overall, national demand will be low to very low into the foreseeable future.”

Oil pulls back while gas remains strong

Commodities

Key benchmarks have dropped from highs seen last week while natural gas, while dipping, is still strong.

Oil trading

External factors have caused oil prices to peel away from the big gains made last week. Prices began falling on Friday, and they’ve subsequently stabilised a little as of Tuesday.

WTI had breached the $71 level while Brent was punching towards the $74 level. Both benchmarks were showing positive movements on Tuesday morning, with WTI up nearly 1% on the day after falling by the same level on Monday. Brent had made 0.6%.

A stronger greenback has been hitting dollar-denominated crude across the week. At the upcoming Fed meeting, markets are expecting to see more concrete stimulus tapering agreements, which has lit a small fire under the dollar.

Elsewhere, the potential collapse of Chinese property giants Evergrande is causing massive ripples around the world. The effects are starting to seep into oil markets as China ponders a potential financial crisis.

Another threat to oil prices is increased supply. Supply/demand metrics have been on a delicate balance throughout the duration of the pandemic. Adding more could upset that.

Nine new rigs have been added to US infrastructure, according to Baker Hughes, bringing the total up to 512.

Despite this, 23% of Gulf of Mexico rigs remain shuttered thanks to Hurricane Ida. We may not be seeing a US oil glut just quite yet, but it is something to think about.

In terms of demand outlook, we all know Delta variant has thrown a rather large spanner in the works this year.

However, OPEC+ has revised its demand recovery predictions for 2022 upward by 900,000 barrels. A mix of strong economic growth and higher fuel consumption should power total annual demand to 100.8m bpd next year, according to OPEC+.

The US’ decision to open up flights to fully vaccinated travellers from the UK and EU will also help generate more demand as trans-Atlantic flights pick up.

A quick look at the most recent US crude inventories report shows a 6.4m barrel drawdown. At 417.4 million barrels, US crude oil inventories are about 7% below the five year average for this time of year, according to EIA data.

Natural gas trading

Natural gas prices started the week by pulling back from the previous week’s highs. As of Monday, prices had dropped from the mid-week $5.60 level to the $5.01 mark.

It’s thought that higher winter-driven demand has already been priced into natural gas contracts, hence the prices we’re seeing now.

In the short term, US weather patterns point to medium to low demand this week, which may help bring prices back down to earth.

Working gas in storage was 3,006 Bcf as of Friday, September 10, 2021, according to EIA estimates. This represents a net increase of 83 Bcf from the previous week. Forecasts called for a 76 Bcf build-up.

As we’re in injection season, the US could be about to fall behind the 3.5 trillion cubic feet needed to satiate winter demand. If conditions are particularly harsh, then prices may rocket as temperatures drop.

For context, 2020’s winter build-up, as of the close of injection season on October 31st, was over 3.9 Tcf.

It looks like there is some catching up to do for US gas stockpiles.

Elsewhere, China’s gas consumption potential is being flagged as “stunning”. Alexey Miller, CEO of Gazprom, has said the world’s second-largest economy’s natural gas consumption is growing at a faster rate than any other Asia-Pacific nation.

According to Miller, China’s natural gas consumption increased by more than 15% in the first half of 2021. Imports increased by more than 23% during the same period.

This will all be music to Miller’s ears. In 2014, Gazprom inked a $400bn supply deal with China to deliver gas over 30 years.

UK inflation surges, stocks struggle

Morning Note

European markets flat at the open this morning as UK inflation surged to a record high in August and Chinese economic data was soft. China’s retail sales fell to +2.5% in August, down from +8.5% in July, whilst industrial output grew by 5.3%, the weakest in more than a year. Asian stocks were weaker again following another soft session on Wall Street. Macau casino stocks the latest to plummet on a Beijing crackdown – Wynn Macau –27%, Sands China –31%, leaving the Hang Seng down 2%. Evergrande shares fell another 5%. Apple unveiled new products, more spending on content. Shares fell 1%, taking losses over the last 5 days to more than 5%. Stock these days has a look of a safe utility and it always does badly on the September product day.

 

FTSE 100 this morning is flat around 7,030, with energy and financials leading the way higher, tech and healthcare at the bottom. Restaurant Group shares weaker despite some good momentum since indoor dining reopened allowing it to raise earnings guidance. Darktrace shares +8% as it raised revenue guidance, now seeing growth of 35-37%, vs the prior guidance of 29-32%. Fevertree shares up 2% as direct-to-consumer sales doing well and US growth good.

 

Stagflation?

UK CPI inflation jumped to 3.2% in August, the highest since 2012, and rising from 2% in July reflecting a huge month-on-month jump in prices. Not a heap of reaction in the market – sterling still in the recent range after breaking briefly out of it yesterday. Question is one for the Bank of England – it already expects inflation to rise to 4% this year, so it’s unclear whether this will force the MPC into taking a more hawkish stance. It’s hard to say right now – a lot of the pressure could be due to base effects, but equally the core month-on-month increase stood at 0.7%, which shows inflationary pressures are not easing and can’t just be attributed to what happened last year. There is no doubt that with rising energy prices, VAT for hospitality returning to 12.5% and the forthcoming NI rise, living standards are going to suffer. The readings ought to be proving that the transitory narrative was and is wrong and central banks ought to be getting a handle on it to deliver on their mandate. Meanwhile, our power-crazed government are all too willing to impose restrictions on our liberties again over the winter, something that will hurt sentiment and demand in the economy if it happens.  

US inflation slows, slightly

US CPI inflation was a fraction softer than expected. The August CPI jumped 0.3% month-to-month, or 5.3% year-on-year. The all-important core reading excluding food and energy costs was up just 0.1% and below the 0.3% anticipated. Stock futures rallied initially on the news but subsequently gave up gains and ended weaker with little appetite to push higher – selling rallies now seems to be the way, at least in the near-term. Yields fell as 10s plumbed 1.275%, while gold recovered $1,800 and holds this level in early trade this morning. 

Indices technical analysis

S&P 500 looking at the 50-day line again where it has found support all through the rally this year. Now we are heading into the options expiry choppiness which this year has seen selling into the 19th of the month before recovering. Could see this 50-day area given a real test – failure to hold it would open up the potential for the 10% type correction that many in the market expect this month or next. Yields came off so growth won over cyclicals – Russell 2000 down 1.44% vs the Nasdaq off by 0.45%, the former now through its 50-day and 100-day SMAs and looking towards the 11,282 level where sits the 200-day – last tested in the middle of August.

Russell 2000 futs sitting on the 200-day line, the small caps have chopped sideways since February.

The dollar lost more ground, sinking to its lowest in a week after the inflation report. Cable rallied to its best since August 6th above 1.3910, but got slapped back down by the 100-day SMA and this morning trades around 1.3820.

Crude oil remains well support and the International Energy Agency (IEA) reported yesterday that vaccinations for Covid-19 are set to deliver a major boost for oil demand as concerns about the passage of the delta variant start to ebb.

“Already signs are emerging of Covid cases abating with demand now expected to rebound by a sharp 1.6 mb/d in October, and continuing to grow until end-year,” the Paris-based organisation said on Tuesday. Global oil demand is now expected to rise by 5.2m bpd this year and by 3.2m bpd in 2022.

Unexpected outages during August forced a decline in supply for the first time in five months, the IEA said, which extended the sharp drawdown in global oil stocks. “The most severe by far was Hurricane Ida, which wreaked havoc on the key US Gulf Coast oil producing region at the end of August, knocking 1.7 mb/d offline.”  But concerns over delta and its impact on oil demand has kept prices in check – signs that this is already unwinding. Meanwhile the API reported a hefty draw of 5.4m barrels last week, thanks largely to Hurricane Ida. EIA figs today expected to show a draw of 3.6m barrels.

Crude oil (Oct) firmer again and momentum with bulls, just finding some pause for breath at the 61.8% retracement level.

Investors look to Apple product show as equities struggle for momentum

Morning Note

Weak start for equities this morning, taking the baton from a mixed bag for indices in the US and Asia. FTSE 100 off about 0.5% in early trade heading towards 7,000 again, whilst the DAX is closer to the flat line. US CPI inflation later is the chief attraction as well as Apple’s product show. Shares in China fell, while Tokyo closed at a 5-year high.

 

US stock markets showed growth-value divergence: the Nasdaq slipped and the Dow and the S&P 500 rallied as the market attempted to consolidate after a run of five straight losses. We saw a bit of a case of futures pumping, cash dumping: i.e. futures rallying but the market selling off on the cash open, which is never a good setup for the market. Futures are weaker today, whilst the US dollar is weaker, sitting in the middle of the recent range, after running into resistance at 92.85 area for the second time in a week. 

 

Large cap growth/tech dragging a bit, cyclicals and energy doing better. So, some rotation away from tech/growth towards the value/cyclical part of the market. Rotation magic still working on the broader market and keeps it steady in the face of a bigger pullback, for now. Apple up a touch as markets continue to digest the impact of the Epic court ruling and look ahead to today’s product event. Expect new models but I don’t believe there is any game-changing tech about to be revealed. 

 

The market has been conditioned to buy the dip since TINA – there is no alternative. But we have not seen this so much so it’s a market that could be unlearning what it was taught because of things like inflation. Persistent supply problems, labour shortages etc will mean it’s not as transitory as people think and since it’s supply-shock, cost-push (bad) inflation not just demand-pull (good) inflation, it is not good for the market.  Today’s CPI will be closely watched of course, but will be enough to change anyone’s thinking about whether inflation is stickier than the Fed tells us?

 

Big trouble in China: Shares in Evergrande plunged again after the company issued a statement saying it was struggling to offload assets to cover its monster debt pile amid a liquidity crunch. Shares fell more than 11% and trading in some of its bonds were halted.  

 

Crypto pump and dump: Litecoin shot higher in a frenzied spike on a press release purporting to be from Walmart, the retailer telling customers it is introducing a pay with Litecoin function in store. Wow, we all thought, Litecoin has been doing nothing for months and then it’s suddenly in with the biggest retailer in the US. The market obviously felt it was legitimate and was even more assured when Litecoin’s Twitter account share the tweet. It didn’t take long for it to be outed as fake news, however, and Litecoin came crashing down again. Litecoin jumped 35% in the space of 10 minutes before it went south. Pure Wild West – clearly a well-orchestrated bid by one or more holders who wanted to drive the price higher for just long enough to get out with the heads above water.  

 

There was a strong read across for other cryptos (note the spikes on the 5-min charts) but they are mainly starting to regain some momentum.

 

Ocado shares fell after it reported a 10% drop in revenues, caused by the fire at its Erith site on July 16th. Revenues were down before the fire – tough comparisons with last year – but slumped 19% in the period after. More capacity is incoming for the UK but no update on international progress. JD Sports ramped higher again on yet another strong performance with profit before tax and exceptional items rising to £439.5 million. Management forecast outturn headline profit before tax for the full year of at least £750 million.

 Can’t make it up: Last week talked a bit about how Coinbase was getting in a twist over the SEC suing it for launching Lend, a product that would let people earn interest (yield) on their Bitcoin holdings. So, it was quite amusing to see them this week tap the bond market, which lets people earn yield on their assets, ie the bonds. Coinbase said it would offer $1.5 billion in senior bond notes. “This capital raise represents an opportunity to bolster our already-strong balance sheet with low-cost capital,” the company said, though they’ll paying up to 4-5% for the privilege.

MicroStrategy is at it again, the company revealed it has purchased an additional 5,050 bitcoins for about $242.9 million in cash at an average price of $48,099 per Bitcoin. Down about $19m on that deal so far, then. “As of 9/12/21 we #hodl ~114,042 bitcoins acquired for ~$3.16 billion at an average price of ~$27,713 per bitcoin,” tweeted the boss Michael Saylor.

Trouble in the energy markets seems to be getting worse and there is going to be a rough winter as prices seem to be going only way. Call it political insanity led by the green agenda or a perfect storm of short-term factors, it’s not looking pretty right now.

European natural gas benchmarks keep hitting new highs. Henry Hub natural gas prices were up another 4% to $5.20, a fresh 8-year high and a 14-year high for this time of year. Demand for natural gas is actually growing but supply is failing to keep pace. Problem is the drillers can’t get the funding and they’re over geared as it stands so there is not the ability to go big on drilling to take advantage of the higher prices. Which means inventories are going to keep being squeezed and prices are going one way.

Oil is well and truly back to the races for a fresh run at the YTD highs after breaking above the Aug range at long last. As anticipated given it had completely backloaded its prior demand forecast for 2021 with all the growth to appear in H2, OPEC has finally had to cut its outlook. The cartel trimmed its world oil demand forecast for the last quarter by 110k bpd due to Delta.

“The increased risk of COVID-19 cases primarily fuelled by the Delta variant is clouding oil demand prospects going into the final quarter of the year,” OPEC said in the report. “As a result, second-half 2021 oil demand has been adjusted slightly lower, partially delaying the oil demand recovery into first-half 2022.” OPEC is sticking with the 6m bpd increase in 2021 vs 2020 though, with Q3 showing resilience despite the ongoing problems with the pandemic. But the outlook for 2022 is bullish, with OPEC raising its oil demand forecast for next year by 900k bpd from last month’s outlook, taking demand growth in 2022 to 4.2m bpd. Meanwhile short-term pressure on supply remains with Hurricane Nicholas making landfall in Texas this morning.

WTI made a 6-week high and now clear of the August range and near-term trend resistance.

Stagflation: Industrial giant 3M yesterday warned that inflation is currently higher than company thought in Q3, seeing broad-based inflation, warns on chip shortages. 

 

And it’s not looking like it’s as transitory as the Fed keeps telling us. The Fed reports that consumer 3-year ahead inflation expectations hit 4%, a series high. One-year-ahead inflation expectations rose for the 10th straight month to a median of 5.2% in August. Food prices are expected to grow by 7.9% annually, up from 7.1% in July. Rent is expected to rise by 10%, and the price of medical care is expected to rise by 9.7% over the next year. 

 

Ok so supply chain problems are not the Fed’s fault, but AIT was always going to let inflation expectations become unanchored since it means the market no longer anticipates the Fed will step in. Previous incarnations of the Fed would have sought to guide the market to expect tighter financial conditions by now.

Risk on to start the week as inflation looms

Morning Note

Stocks are trading a tad firmer in the early part of the session, after a toughish week. US indices fell for a fifth straight day on Friday, weighed down by Apple’s setback, the stock falling over 3% after a court dealt a big blow to its app store payment model. Tesla shares fell 2.5% after Cathie Wood’s Ark group sold down its holdings. More than a whiff of mega cap tech/growth fading – question is whether we get the rotation into cyclicals to keep the market grinding higher. Dip buyers failed to come in last week so looking perhaps to see whether there are further losses to come. Futures are this morning trading in the green. Meanwhile inflation is still a problem, with US producer prices rising 8.3%. China’s regulatory crackdown on big tech continues, with Beijing planning to break up Ant’s mobile platform Alipay, sending Alibaba shares down 5% in Hong Kong and the broader Hang Seng down by 2%. 

 

Nevertheless, there is a mild risk-on feel to the start of the new trading week. The FTSE 100 is up half of one percent after it tested the 7,000 support last week, which has held for now. The index is slap in the middle of the range it’s treaded since April, failing to break out in any meaningful way. Utilities, energy and financials doing the lifting this morning, with Royal Mail and National Grid at the top of the leader board. ABF fell to the bottom despite raising its profit target for the year on improved margins as supply chain problems hurt sales. SThree shares jumped another 6% after it also said profits would be ahead of expectations – staffing shortages playing into the hands of recruiters.

Inflation ahead

Stagflation: The US PPI reading for August was hot, with prices up 0.7% month-on-month and sending the annual increase to 8.3%, the biggest since records began in 2010. Whilst some may argue that this is transitory, and due to supply chain bottleneck, shortage of vessels etc etc, and therefore ‘nothing the Fed can do about it’, you have to ask yourself whether expansionary monetary policy is actually doing more harm than good right now.

 

Light day for data so all eyes on the US consumer price index tomorrow. The key inflation reading for the month of August is set to come in at 5.3%, according to consensus. In July, inflation steadied at 1 13-year high of 5.4%. Core inflation rose 4.3%. But there was some moderation in the month-on-month increase, with core at +0.3% vs +0.9% in June. Vehicle prices have been one of the main drivers of the increase, but the pace of price increases slowed almost to a halt in July. A hotter-than-expected reading tomorrow could see the market adjust its view of when the Federal Reserve begins tapering asset purchases. Cooling in inflation pressures would be positive for market sentiment.

Oil prices advance

Crude oil prices are firmer with WTI (spot) nudging its head above $70 again. Supply remains affected by Hurricane Ida. OPEC is due to release its monthly outlook later today. In FX, the dollar is firmer, with the euro dropping to its weakest since the end of August. GBPUSD is just about holding on to 1.38. Hard to talk meaningfully about FX trades right now with everything so range bound and trading sideways. Elsewhere, Bitcoin is lower again around $4k and chart action looks dicey. 

Can oil reach $100 per barrel?

Commodities

Several factors could push oil towards $100 per barrel as the markets look to sustain momentum. In natural gas, we can see a supply/demand deficit supporting prices.

Oil trading

Despite the Saudi price cut for the Asian market, oil started the week fairly strongly.

Prices stabilised and have continued to hold ground at key resistance levels after OPEC-JMMC monthly talks. At the time of writing, WTI was trading for around $69.00. Brent crude is trading for $72.43.

$70 may be the real test for WTI going forward after the benchmark was pushing towards that region on Tuesday morning.

One important takeaway from oil markets at the start of the week is the size of the drawdown shown in the latest EIA crude inventories support. Crude oil inventories showed one of the highest drawdowns to date, according to EIA data for the week ending August 27th. Stocks dropped by 7.2m barrels from the previous week then. Working US crude oil inventories now stand at around 425.4m – 6% below the five-year average.

Don’t be surprised if this isn’t sustainable – not due to demand, but due to the impact of Hurricane Ida. Much of the US’ oil infrastructure lay in its path, and several rigs in the Gulf of Mexico were closed as the storm passed through. We’re likely to see lower numbers in the next report on Thursday.

Removing Ida’s impact from the equation, If conditions are right going forward, some analysts believe an $100 oil price can be reached if not this year, then in 2022.

OPEC+ is feeling particularly robust with regards to the wider demand picture. It’s upgraded its demand outlook to 4.2m bpd by 2022.

The cartel decided to stick with its 400,000bpd monthly output hikes in its September meeting. It’s a fairly harmonious realm over at OPEC+ HQ right now. September’s discussions took under an hour to reach an agreement – far shorter than the month-long tussle seen in August.

Other factors at play that could push oil towards the $100 mark include:

  • Record revenues from oil majors, particularly shale producers – According to Rystad Energy, US shale firms are on course to create record-breaking revenues this year, to the tune of $195 billion before factoring in hedges in 2021.
  • Demand recovery in China – China is the world’s largest crude oil importer. It’s not slow to act when containing new COVID-19 outbreaks. The latest Beijing lockdown halted private travel, but now apparently the city is COVID-case free, so it appears these ultra-restrictive lockdown measures work. Reports are now saying Chinese importers have picked up delivery requests and China could now be on the way to full demand recovery.

Goldman is still a firm oil bull. The investment bank estimates prices will hit $75-80 by the end of 2021.

While this is all encouraging, the simple fact is the virus is still knocking around. We are still in a pandemic. Worldwide oil demand recovery is tied in with case numbers. There are indicators that infections across the globe are starting to fall, but there is a long way to go until we’re back to normality.

Natural gas trading

Natural gas prices have continued to soar to regions not seen for years. A mixture of robust heat, flat inventories, and Hurricane Ida’s impact continue to buoy prices.

Weather is expected to heat up in key US demand areas across the coming weeks. Natural Gas Weather rates demand forecast as a medium at the time of writing, but this could increase to high along with rising temperatures.

Supply squeezes are also doing their bit to support prices. According to data from the EIA, the total average natural gas supply fell by 2.3%, or 2.3 Bcf per day, compared with the previous report week.

Drops in output are likely linked with the effects of Hurricane Ida. Much of the US’ gas production infrastructure sat squarely in Ida’s path. Two weeks later, the process of reopening gas facilities is still underway.

Prices could rise further beyond their already strong highs if this is the case. The current supply/demand deficit, particularly in hurricane-hit regions of the US, shows a market imbalance, which is partly why natural gas prices are performing well.

At the time of writing, natural gas was trading at the $4.671 level.

Working gas in storage was 2,871 Bcf as of Friday, August 27, 2021, according to EIA estimates. This represents a net increase of 20 Bcf from the previous week. Stocks were 579 Bcf less than last year currently and 222 Bcf below the five-year average of 3,093 Bcf. At 2,871 Bcf, total working gas is within the five-year historical range.

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