Commodities Weekly

A rosy European gas outlook for next winter with “tank-top” risks in play

 

Global commodities

Europe’s gas market is looking rosy. Thanks to mild temperatures last winter which significantly curbed consumption, and China’s zero COVID policy which let Europe import plenty of LNG that otherwise would have been more challenging to acquire, the continent’s gas storage bottomed out at 55% of capacity at the end of the winter heating season in March – well above the five year average of 29%. With the injection season in full swing, replenishing storages to the European Commission’s target of 90% of capacity ahead of next winter’s heating season is now a lot easier. Our modelling estimates point to the abundance of LNG inflows, alongside a continuation of demand conservation efforts by households and industry will allow the European Perimeter (northwest Europe, Italy and Austria) to completely fill gas storage levels – a “tank-top” scenario – before the winter heating season begins in October. At some point, the inflow of LNG will need to slow to prevent inventories from overfilling – the expectation is that China’s manufacturing sector (which uses LNG) will begin to follow Chinese consumers that are back in full swing (which has pushed up jet-fuel and gasoline demand). As this tighten balances, risks to European gas (TTF) prices are skewed to the upside.

 

Energy

Whilst near-term macro angst – US banking turmoil, debt ceiling risks, recessionary fears and financial scarring through low liquidity – has dominated crude oil markets over the last two weeks, oil bulls have eked out a revival in recent trading sessions following an updated timeline on refilling the US Strategic Petroleum Reserves (SPR), as well as finding some support through the weakening in the dollar after the easing US inflation print.

 

Base metals

Copper inventory marked for withdrawal from LME warehouses fell to the lowest on record this week, in a sign of weak demand from industrial users. Whilst this may add ammunition for prices to edge lower and test the USD8,000/MT level, absent an actual growth shock, the market deficit in copper may serve to reinforce the market tightness and eventual necessity for a scarcity price spike to the upside.

 

Precious metals

The debt-ceiling brinkmanship playing out in US is a plus for gold and silver, further burnishing the havens’ allure at a time when they’re poised to do well given the outlook for lower Fed rates and a US slowdown. From a pricing perspective, gold continues to flirt with all-time highs owing to the effects of both fear (short-term driver linked to recessionary angst and a weaker US dollar) as well as wealth (long-term driver linked to both EMs and the US dollar), reinforcing our bullish price forecasts wherein we look for bullion to remain north of USD2,000/oz into 2024.

 

Bulk commodities

Iron ore is flirting ~USD100/MT in a push-and-pull with signs that some Chinese steel mills are resuming production being juxtaposed against lower Chinese iron ore import data for April. These counterbalancing forces just how increasingly fragile China’s lacklustre COVID recovery is becoming.

 

Agriculture

Raw sugar prices have edged lower amid optimism that improving weather conditions in Brazil will boost output at the world’s top producer. Still, there are concerns over longer waiting times at Brazilian harbours as the nation is also shipping record soybean and corn crops  this year.

 

Core indicators

Price performance and forecasts, flows, market positioning, timespreads, futures, inventories, storage and products performance are covered in the report.

 

 

CHART OF THE WEEK: UPSIDE EU GAS PRICE RISKS DESPITE TANK-TOPS