Commodities face a challenging first quarter
Gas prices slump on mild winter weather and reduced demand
US natural gas prices slumped to a one-year low at $3.55 on forecasts for milder January weather replacing the frigid cold spell that saw parts of the US grind to a halt ahead of the new year. With milder weather emerging, the much-watched March-April spread – used as an indication of how anxious the market is about the availability of gas in late winter – slumped to just 7 cents having touched $1 in early December.
The slump in Europe’s gas price meanwhile continued for much of the same reasons, and during the past month the price of Dutch TTF benchmark gas has slumped and reached €65/MWH ($20/MMBtu) at one point – the lowest since October 2021. The slump has been driven by a combination of mild weather and strong production from renewables as well as reduced industrial consumption resulting in an unusual seasonal increase in inventories. Gas held in storage across Europe is currently 168 TWh above the five-year average and close to a full month of peak winter withdrawals.
With LNG imports still strong and demand down by more than 10% the continent has now ended up in a situation, unthinkable just a couple of few months ago, where prices need to stay low in order to divert LNG shipments away from Europe in order not to overwhelm local storage facilities.
Crude oil to face a challenging first quarter
Global growth and China Covid-19 concerns, a robust US job market pointing to further pain on the rate hike front, and not least mild winter weather across the northern hemisphere reducing demand for diesel and natural gas have all helped drive the Bloomberg energy index sharply lower during the first week of trading. Crude and fuel products have lost around 8% this week on continued concerns over the near-term demand outlook. A focus being supported by Saudi Arabia’s decision to cut its prices for crude to Europe and Asia in February amid tepid demand and competition from cheap Russian oil looking for a home, especially in Asia.
We maintain the view that crude oil will face a challenging first quarter, where Brent may spend most of the time trading below $80 before eventually recovering back towards the $90 area once the Covid cloud starts to lift in China and seasonal demand starts to pick up. In addition, we have strong doubts about the recession risk to the US economy and see demand from some of the world’s largest consumer underpin the price during a year where supply will continue to be managed by OPEC+ and US producers inability or unwillingness to ramp up production.
Summary: Cautious and defensive trading best describes the early 2023 price action across the commodity sector, and while the year ahead will hopefully provide less drama and voilatility than last year, plenty of unresolved issues ramain. The main questions being asked early on relates to China’s messy exit from its long-held Covid-zero policy and what the recovery will look like. Add to the mix inflation, recession risks and the sad and unresolved situation in Ukraine and we could see a weak first quarter being followed by strength in the following
Information Source: Read More By: Ole Hansen, Head of Commodity Strategy, Saxo
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