US Natural gas futures slip – is the honeymoon over?

With US natural gas futures on a downward trend, we ask is time up for high gas prices?

Natural gas trading

Natural gas futures start the week in the red

What a couple of weeks it’s been for the Henry Hub natural gas contract.

It seems only yesterday that we were talking about natural gas reaching all-time highs. It’s certainly true that wholesale commodity prices in Europe and Asia are still exceptionally high.

While oil continues to rise, gas looks like it’s on the decline. But in terms of the US, which Henry Hub focuses on, we’re asking is the honeymoon over?

Prices were firmly in the red on Monday. Starting the day at around $5.20, Henry Hub futures dropped to $4.90 at their lowest. As of Tuesday morning, prices had climbed back into the green, before slipping down to the $4.90 level.

Why the slump? There are a couple of factors at play.

First up, there is the weather. Mild to seasonal high temperatures across much of the US is capping off demand.

Natural Gas Weather states: “One weather system will bring showers to New England, while a second system tracks through the Mtn West w/rain and snow, but both mild w/highs of 40s to 60s. The rest of the US will be nice w/highs of 60s to 80s for very light national demand.

“The system currently over the Mtn. West will track across the Great Lakes and Northeast this weekend w/highs of 40-60s, lows 20s-40s for a modest bump in national demand.

“For next week, weather systems will bring rain and snow to the West, while very nice over the eastern 2/3 of the US. Overall, national demand will be LOW through Friday, then MODERATE this coming weekend.”

Basically, not a lot of need for gas heating in key consumption areas of the US.

However, we have seen a slight bump in gas consumption. For the week ending October 8th, US consumption increased 1.3% week-on-week.

We’re also in injection season: the time of year when the US looks to build stockpiles in line with colder winter temperatures.

The EIA forecasts that US natural gas inventories ended September 2021 at about 3.3 trillion cubic feet 5% less than the five-year average for this time of year. Injections into storage this summer have been below the previous five-year average.

This was down to a combination of hot summer temperatures leading to more electricity use for cooling purposes and increased exports. Despite this, domestic production has remained fairly flat across the year. A sizeable chunk of US production infrastructure was shuttered earlier in the year due to Hurricane Ida.

The latest EIA data ahead of Thursday’s release shows total stocks standing at stood at 3.369 Tcf for the week ending October 8th – down 501 Bcf from a year ago and 174 Bcf below the five-year average once again.

Gazprom to the rescue?

Switching to European markets, Gazprom might be following the lead of President Putin (read: orders of President Putin) by stepping up production capacity for its long-term gas deals.

“Of course, if Russia’s European partners increase orders and if the volumes in long-term contracts grow, I think that Gazprom will surely develop its production capacity,” Deputy Prime Minister Alexander Novak said in an interview during last week’s Russian Energy Week summit.

This is pipeline all part of pipeline politics. Russia has been accused of gas market manipulation in an effort to force the EU into accepting the Nord Stream 2 pipeline. Never mind that this is pretty much a necessity for Germany’s energy needs, but the bloc has long been basically hostile towards Russia.

But as the European gas crisis rolls on it seems the deck is stacked fairly heavily in Gazprom and Russia’s favour. They’re the ones with the gas. They’re the ones with the export infrastructure. They’re the ones with more customers than just Europe.

Unless Europe picks up more gas from America or Qatar, then it’s likely to remain reliant on Russian products for the foreseeable future.

Stocks rally, inflation sticks, earnings on tap

Stock markets rose in early trade as investors parsed the latest signs of inflation and the central bank reaction function, whilst earnings season has got underway across the pond with some decent numbers from JPMorgan. Wall Street rose mildly, snapping a three-day losing streak. VIXX is off sharply, which maybe reflects increasing comfort that the market has stabilised, if not able to make new highs just yet.

Earnings season gives investors a chance to ignore some of the noise and market narratives and get into actual numbers. Only this time we expect the corporate reporting season to underline the inflation narrative – the question is whether it’s just inflation or stagflation. Probably we get a bit of both – watch for sandbagging. JPMorgan numbers were positive, but as ever the stock fell despite beating on the top and bottom line. Profits were boosted by better-than-expected loan losses. Trading revenues were robust, asset and wealth management strong, loan growth improving and likely to pick up in 2022. Delta Air Lines also posted numbers that topped expectations including a first quarterly profit ex-state aid since the pandemic. But higher fuel costs and other expenses will hit the fourth-quarter profit – shares fell over 5%. Today sees Citigroup, Bank of America, Morgan Stanley and Wells Fargo report.

Chinese producer price inflation rose 10.7% in September, the highest level since 1996. The China PPI number is an important leading indicator for global consumer inflation. On that front, US consumer price inflation accelerated in September to 5.4%, with prices up 0.4% month-on-month. Core rose 0.2% from August, leaving prices ex-volatile items like energy and food at 4%. US PPI inflation today is seen at +0.6%, +0.5% for the core reading.

Minutes from the Fed’s last meeting indicated the US central bank is likely to commence tapering asset purchases next month. “Participants generally assessed that, provided that the economic recovery remained broadly on track, a gradual tapering process that concluded around the middle of next year would likely be appropriate,” the minutes said.

Post the CPI and FOMC minutes we see Treasury yields lower, the dollar lower, gold firmer. Lower bond yields lifted megacap growth, or at least provided some marginal buying excuse to do so. Inflation is still hot but not getting much hotter. Narrative has clearly exited team transitory to support team sticky. The question now is whether we are at peak in/stagflation fears and this allows the market to move on to start pricing for 12-18 months hence, by which time you’d feel a lot of the post-pandemic bottlenecks and pressures will have eased. The problem for this – still team transitory if you like – is that anything that raises the costs of getting goods from source to consumer is inflationary and the pandemic has certainly been that. But so too is the shift in globalisation trends, eg Brexit.

Sterling is firmer as the dollar weakened in the wake of the CPI report. GBPUSD has broken free of the trend resistance and with bullish MACD crossover in play. Bulls would like to see the previous two highs on the MACD cleared (red line) to confirm reversal of the downtrend since May.

GBPUSD Chart 14.10.2021

Chart: Dollar index easing back to the middle of the channel, but faces pressure from bearish MACD crossover.

Dollar Index 14.10.2021

Yesterday I noted that gold was likely to face some volatility and break free from its recent consolidation. CPI numbers were indeed the catalyst and we saw gold prices hit the highest in a month, approaching $1,800 before pausing. Near-term, consolidation again with the 1hr chart showing a clear flag pattern with the lower end capped by the 23.6% line.

Gold Chart 14.10.2021

Chart showing gold price movements on 14.10.2021

Oil has firmed, with WTI recovering the $81 handle, though price action remains sluggish and sideways for the time being. OPEC yesterday cut its global oil demand growth forecast for 2021 but maintained its 2022 view and cautioned that soaring natural gas prices could boost demand for oil products.

OPEC cuts its demand growth forecast for 2021 to 5.82 million barrels per day, down from 5.96 million bpd. As we noted some months ago, it was always likely that OPEC would need to trim its 2021 forecast since it had always backdated so much of that extra demand to come in H2. The original 6m bpd forecast implied 1m bpd in H1, 5m bpd in H2, which always seemed optimistic. Critically, though, it was not wildly optimistic – demand has come back strongly after shrugging off the summer Delta blues. The cartel maintained its 4.2m bpd growth forecast for next year. EIA inventories today – a day late due to the Columbus Day holiday – forecast 1.1m build.

Crude Oil Futures Chart 14.10.2021

Nat gas – holding the trend support and 20-day SMA, bearish MACD crossover still in force.

Natural Gas Chart 14.10.2021

Hays shares +4% as fees rose 41% from a year ago. Strong leveraged play on record numbers of job vacancies and staff shortages. Shares have been flat the last 6 months, though +17% YTD, +45% the last 12 months leaves not a lot of room left on the table.

Dunelm still performing strongly against tough comparisons. Total sales in the first quarter increased by 8.3% against a very strong comparative period in FY21, when sales grew by 36.7%. Gross margins were down 10bps and expected to be 50-75bps lower than last year for the full year. Management warned on supply chain problems and inflation but stressed that good stock levels should provide them some cover. Some way to go to for the shares to recover recent highs but encouraging signs.

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

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.

Stocks climb but price action still choppy

Choppy: Stocks are firmer in early trade following yesterday’s losses. For all the movement we have seen, the FTSE 100 is tracking slap in the middle of its 6-month range. But now it’s facing near-term resistance from its 50-day and 100-day averages at 7,092/7,078, which seem to be capping any rallies at the moment, whilst the 200-day support at 6,913 is looking good for a retest. The DAX moved up more than 1%, or about 170pts, to around 15,150 as it looks to recover its 200-day moving average at 15,037. You are in ranges now where you feel it could break either way – as noted earlier this week you need to feel that the repricing for risk from a different macro outlook and rate environment (higher yields) has bottomed, that the valuations are looking healthier, earnings can deliver beats not misses and that we’ve passed peak inflation/stagflation ‘fear’ (if not the actual environment, which could last for many months).

Wall Street reversed early losses to rally on signs of progress on the US debt ceiling. The Dow Jones industrial average erased a drop of 400pts to end the day up 100pts. The S&P 500 rallied 0.4% as mega-cap tech rallied as bond yields didn’t really push on and investors thought they’re close to being oversold. But it’s still all rather indecisive. The S&P 500 continues to chop around its 100-day SMA and the 4,300 area. Futures are indicating higher with 10yr yields back down to 1.52% from 1.57% hit yesterday, the highest since June.

Senate Minority Leader Mitch McConnell said Republicans would back a short-term motion to raise the debt ceiling. “To protect the American people from a near-term Democrat-created crisis, we will also allow Democrats to use normal procedures to pass an emergency debt limit extension at a fixed dollar amount to cover current spending levels into December,” he tweeted.

ADP reported that private payrolls increased by 568k jobs last month, easily topping expectations. Allowing for the usual ADP caveats, this is a positive signal ahead of the nonfarm payrolls report on Friday – remember a key release ahead of the Fed’s November meeting re tapering.

Natural gas was the big story as prices spiked out of control in Europe/UK. US Henry Hub prices did reach a new multi-year high before reversing, apparently on comments from Vladimir Putin who said Russia would seek to stabilise the market and pump more gas. There is a lot going on there – political machinations aplenty and questions over whether much of the problems in the market have been Russia’s doing in the first place (weaponization of gas), but it did seem to cool the market. Prices are down 15% from yesterday’s $6.46 peak and now testing lowest in a week around $5.50 and possible bearish MACD crossover in the offing could signal a top.

Oil was weaker too as it also seemed to consolidate after extending the rally into overbought conditions – as highlighted on Tuesday. Inventories were mildly bearish too, rising 2.3 million barrels last week. The US said it was considering releasing oil reserves to cool prices – always a political hot potato in the US as much as in Europe. WTI is close to 5% below yesterday’s high at $76, possible test of near-term Fib and trend support around the $75.60 area.

Crude Oil Futures 07.10.2021

Talking of rising fuel costs, these are feeding into rising inflation expectations. UK inflation expectations topped 4% for the first time since 2008. A gauge of US inflation expectations has moved to its highest since June.

In FX, the euro made fresh YTD lows yesterday but is steadier this morning, with EURUSD back to 1.1560. Looking a tad oversold but the fresh low needs to mark a bottom soon or further selling can take off on another leg lower.

EURUSD Chart 07.10.2021

Vlad to the rescue? Putin steps in to calm nat gas crisis

Vlad to the rescue… Looks like Putin has just come in to call a (temporary) halt to the gas crisis in Europe, finally stepping in with comments that have offered some stability to the market after a tumultuous morning/week.

Putin says:

  • Boosting gas supplies to Europe
  • Ready to stabilise global energy market
  • Gazprom supplies to Europe to reach new record
  • Increasing gas transit via Ukraine & will exceed contractual obligations for gas via Ukraine.

Henry Hub Nat Gas prices were offered on the comments/headlines that Russia is ready to help out. The situation remains difficult of course but could be that Putin has just put a ceiling on these crazy market moves for the time being. There are other factors but a boost in supply from Russia would ease immediate concerns in Europe. Longer-term of course the lack of fossil fuel capex in response to high prices is a big driver of prices staying higher for longer. Winter is coming and supplies are still very short and markets volatile. Plus how long does Putin play nice?

Anyway, it seems to have calmed the market for the time being. One thing you have to take from all this is that Nord Stream 2 is surely going to be approved soon…Merkel stressing in comments just a few minutes ago that it is not yet ready.

Henry Hub prices tumbled off the highs to test $6 again on the news crossing the wires. UK prices have meanwhile completed a heck of a round trip with a daily gain of 40% reduced to 4%. Whilst US nat gas prices are not directly correlated to the situation in Europe we can see that the comments from Putin hit prices as they crossed the wires. Oil was also pulled down on the comments.

Natural gas chart 06.10.2021

Oil surges to seven-year high on OPEC+ decision

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.

Monthly recap: German elections, hot UK inflation and NFP miss

We recap some of the key market movers from September in this monthly round-up. 

Monthly markets recap: September 2021

Germany waves goodbye to Angela Merkel in tight federal elections 

After sixteen years at the helm, Angela Merkel will step down as German Chancellor following late September’s closely contested German elections. 

It’s a hugely fragmented result. Pretty much all parties did worse than they thought. The SPD is the majority party, but they’re still very close to the CDU to really have a massive advantage. You could only separate them with a cigarette paper really.  

The Green’s, after topping the polls four months ago, came in third while the FDP came in fourth.  

Olaf Scholtz, the leader of the SPD, now has his work cut out trying to turn these close results into a working coalition. But what we’ve seen is what our political guru and Blonde Money CEO Helen Thomas calls a Code Red for Germany – that is a shift to the left with a bit of a green hint too. 

What the next German federal government looks like now is up for debate. The Green Party is probably going to be central, after doubling their Reichstag presence, but it’s out of the CDU and FDP to see who becomes the third coalition partner. See Helen Thomas’ election round-up below for more information. 

Nonfarm payrolls’ massive miss 

Nonfarm payrolls came in well below expectations in a wobbly US jobs report.  

In August, 275,000 new jobs were added to the US economy, falling far below the 750,000 forecast. 

The unemployment rate dropped to 5.2% while labour force participation stayed unchanged at 61.7%. Hourly earnings rose 0.6% in August, surpassing market predictions of a 0.3% rise. 

Jerome Powell and the Federal Reserve keeps a close eye on the jobs report. Labour market participation has been one of the key metrics the Fed has been looking at throughout the pandemic to decide on whether to start tapering economic support. 

We know that Jerome Powell and the Fed loves a strong jobs report. But we also know that tapering is on its way anyway – likely in November. August’s job data may not have impacted decision making too much, given the tapering signals were made long before its release.  

However, Fed Chair Powell still believes the US is still far from where he’d comfortably like employment to be. 

Speaking last week, Powell said: “What I said last week was that we had all but met the test for tapering. I made it clear that we are, in my view, a long way from meeting the test for maximum employment.” 

A recent survey taken by the National Association for Business Economics showed 67% of participating economists believed job levels won’t reach pre-pandemic levels until the end of 2022. 

UK inflation jumps 

August’s CPI data, released in September, showed UK inflation had reached 3.2%. That’s the highest level since 2012. 

Rising from 2% in July, the latest CPI print also showed a huge month-on-month rise in prices. Inflation soared well clear of the Bank of England’s 2% target – although the UK central bank did say it believed inflation would hit 4% in 2021. 

However, some market observers believe there is a risk that inflation will overshoot even the 4% level. 

The question is how will the BoE respond? A more hawkish tilt could be possible.  

Markets.com Chief Markets Analyst Neil Wilson said: “Unanchored inflation expectations are the worst possible outcome for a central bank they’ve been too slow to recognise the pandemic has completely changed the disinflationary world of 2008-2020. 

“My own view, for what it’s worth, is that the Bank, just like the Fed, has allowed inflation overshoots to allow for the recovery, but it’s been too slow and too generous. Much like the response to the pandemic itself, the medicine (QE, ZIRP) being administered may be doing more harm (inflation) than good (growth, jobs).” 

China intensifies its crypto crackdown 

Bitcoin was rocked towards the end of September after being hit with a body blow landed by the People’s Bank of China. 

The POBC has ruled that all cryptocurrency transactions in China are illegal. That includes all transactions made by Chinese citizens domestically and those coming from offshore and overseas exchanges. 

BTC lost over 8% and nearly dropped below the $40,000 mark on the news from Beijing. It has subsequently staged a comeback, but this latest move from China tells us a couple of important things about crypto. 

Number one: volatility is ridiculous. The fact that Bitcoin is still so susceptible to big swings on both positive and negative news shows it’s still very volatile. It seems hard to see a future driven by crypto right now if such price swings will be the norm. If this is the case, let’s hope it calms down in the future. 

Secondly, it’s that central banks are still wary of digital finance. In China’s case, it loves control.  

Beijing’s official stance is that cryptocurrency is a) illegitimate, b) an environmental disaster, and c) something it cannot control completely. Freeing finances from government oversight is the entire point of decentralised finance (DeFi) after all. In a country as centralised as China, that’s a no-go.  

China has pledged to step up its anti-crypto, anti-mining efforts further. This could cause major ripples for Bitcoin and the digital finance sector as a whole. A significant chunk of global token supply comes from Chinese miners. Someone else will have to pick up the slack. 

Oil & gas prices stage major rally 

A global gas shortage and tighter oil supplies pushed prices into overdrive towards the end of September. 

Natural gas, in particular, was flourishing. At one point, gas had climbed above $6.30, reaching highs not seen for three years. Basically, there’s not enough gas to go around. High demand from the UK and EU is pushing prices up, while the US, which is meant to be in injection season, is also suffering. Asian demand is also intensifying. 

In terms of oil, a supply squeeze coupled with higher demand caused by major economies reopening is putting a support under oil prices.  

Traders are also confident. Energy markets are the place to be right now. As such, trader activity appears to be pushing these new highs and is confident regarding the market’s overall strength. 

Goldman Sachs has also revised its oil price targets upwards. 

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.” 

Oil & gas stage major surge

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.”

Are these five gas crisis stocks worth a look?

As the European gas crisis threatens to go global, Morgan Stanley eyeballs some stocks that could benefit from the current conditions.

Gas crisis stocks

Gas prices soar in Europe

The EU’s natural gas import prices have skyrocketed 440% in recent weeks, putting massive strain on energy firms across the continent. The same is true in the UK where surging gas prices have caused several small energy suppliers to fold completely.

In the US, prices were up 100% year-on-year midway through September.

Globally, prices are roughly 250% higher than they were in January.

Henry Hub natural gas futures are showing rapid daily gains. At the time of writing, the HH contract is up over 7.2% in trading today. Prices are approaching yearly highs at $5.53.

We’re very rapidly approaching crunch time. The UK, for example, only has enough gas to last four or five winter days. Combine with food and petrol shortages, the winter is looking very cagey for Britain right now.

The US should also be gearing up injection season right about now. Usually lasting up to Halloween, injection season is when natural gas stocks start to build in preparation for high winter demand. 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.

Skyrocketing prices can be explained simply: there isn’t enough to go around.

Cold temperatures around the world last winter led to higher-than-expected drawdowns. Without adequate inventory replenishment, things were always going to escalate.

There is also heightened consumption and competition from Asia to contend with. Wood Mackenzie estimates that Asia, in particular China, will account for 95% of worldwide LNG demand growth by 2022. China’s appetite for LNG is such that even the $400bn, 30-year deal Beijing struck with Russia’s Gazprom in 2014 will not even scratch the surface of China’s gas requirements.

A perfect gas storm has been brewing and we’re seeing the cons

Which stocks can potentially benefit from the gas crisis?

According to Morgan Stanley, the current market conditions are ripe for investors and traders looking to add utility firms to their portfolios.

The five stocks selected by Morgan Stanley include:

  • Ørsted
  • Iberdrola
  • RWE
  • EDF
  • Engie

“Buy Ørsted (Overweight) and Iberdrola (Overweight) on weakness: We recognise that the recent gas clawback will have a negative impact on 2021 and 2022 earnings for Iberdrola … triggering EPS downgrades. However, this appears well priced in with Iberdrola’s market cap,” Morgan Stanley analysts said in a statement.

For context, the Spanish government has announced a 2.6bn euro tax on energy firms to help protect consumers.

The bank also said Ørsted has an estimated 34% potential upside to its price target, while for Iberdrola the figure is 38.7% (within Morgan Stanley’s 12-18 month price target).

Morgan Stanley also said: “We see RWE (Overweight), EDF (Overweight) and Engie (Overweight) as our preferred names to play the strength in power prices, with limited contagion risk from political intervention.”

According to the investment bank, RWE has a potential 35.4% upside to Morgan Stanley’s price target, the analysts estimated. For EDF the figure is 58.1% and for Engie it is 44.5%.

Of course, you could also look at trading pure natural gas contracts too away from stocks. Forecasts are calling for this winter to be one of the coldest for years, with the US meteorological department saying February will be the coldest month.

There may also be some overlap in the above for those interest in renewable energy. Ørsted covers 29% of the world’s offshore wind power segment. The Norwegian energy supplier made our list of renewable energy stocks to watch in 2021 as a result of its major market presence and future potential.

Oil pulls back while gas remains strong

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.

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