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Spot crude surges while futures slip; rate hikes spook speculators

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© Reuters. FILE PHOTO: Pump jacks operate at sunset in an oil field in Midland, Texas U.S. August 22, 2018. REUTERS/Nick Oxford/File Photo/File Photo/File Photo/File Photo

By Arathy Somasekhar and Stephanie Kelly

HOUSTON/NEW YORK (Reuters) – Prices for spot crude in much of the world are rising on strong demand and a supply crunch, but in the oil futures market, worries of a recession have kept a lid on values.

Oil futures could be oversold and ripe for a reversal if global demand keeps running at the current rate of about 100 million barrels per day, closing in on pre-pandemic levels.

China has eased pandemic lockdowns in Beijing and Shanghai, which analysts said will further support demand and boost fuel prices as summer travel heats up in the northern hemisphere.

The physical markets have been further tightened by supply shortages due to sanctions on Russian oil, little spare capacity among big producers and worries of new outages in Libya.

Still, futures market investors and traders have pared their risk appetite, worried that U.S. interest rate hikes from the Federal Reserve could slow the economy.

“You have these physical markets which are tied to realities on the ground, real supply/demand factors, but there is so much uncertainty on both sides of supply and demand that the financial markets always want to be a step ahead,” said John Auers, executive vice president of consultancy Turner, Mason & Co.

Brent crude futures have declined about 8% since mid-June when the Fed and European central banks raised interest rates. U.S. crude futures fell 10%.

Conversely in physical markets, offers for medium sweet Forcados Blend and light sweet Qua Iboe from Nigeria, and North Sea grades Oseberg and Ekofisk last week were all at record highs.

In the United States, WTI-Midland and WTI at East Houston traded at a more than $3 premium to U.S. Crude futures, to touch their highest in more than 2 years.

Prices for physical crude do not always trade in tandem with oil futures. But a substantial divergence in differentials can point to speculators out of sync with fundamentals.

In a sign of tight supply, U.S. crude stockpiles fell to 930.3 million barrels in the week to June 10, lowest since 2004, even as U.S. President Joe Biden’s administration releases more than a million barrels per day from emergency oil reserves.

Light sweet crudes, like WTI Midland, are getting “bid to the moon” by European buyers, partly on worries of a lack of Libyan barrels, one trader said.

Some production and export facilities in Libya were shut down earlier this month amid political dispute over the control of government.

U.S. crude exports to Europe climbed in March and April as buyers snapped up the country’s light sweet grades to replace Russian oil.

Open interest in WTI futures on the New York Mercantile Exchange fell on June 16 to the lowest level since May 2016 as traders sought to cut risk, worried that higher interest rates could trigger a recession and slash oil demand.

Open interest denotes the number of active contracts, and this figure falls when traders close more positions than are opened in a day. Lower liquidity typically results in a more volatile market with drastic price swings.

“Supply and demand fundamentals have not been altered, but the financial assets aspect of it is a sentiment shift,” senior energy trader at CIBC Private Wealth US, Rebecca Babin, said.

“Typically, the supply and demand fundamentals will mean things will revert back over the medium term, but you can experience a lot of volatility from the financial asset market in the meantime,” she added.

(Refiles to say CIBC Private Wealth US, not CIBC Wealth, in second to last paragraph)

Commodities

Experts named the main reasons for increase in gas prices in the European Union

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reasons for increase in gas prices

Problems with the restoration of full operation of the Nord Stream pipeline continue to put pressure on gas futures prices in Europe, and this factor remains the key reason for the increase in gas prices.

Exchange gas prices in Europe began last week near $2,100 per thousand cubic meters and rose gradually. This week, the growth accelerated: Monday prices were over $2,400 per thousand cubic meters for the first time since early March, and at the opening of trading on Tuesday they were over the $2,600 mark.

Why do gas prices keep going up? 

Why do gas prices keep going up? Last week, gas prices in the EU started going up again. It was caused by Gazprom’s statement that anti-Russian sanctions hamper resolution of the situation with transportation and repair of Siemens engines for the Nord Stream pipeline.

The analysts also singled out additional price growth factors. Intensification of upward gas price dynamics might have been provoked by a stoppage of annual preventive maintenance of some capacities of Norwegian gas field Troll and gas treatment unit Kollsnes from August 13 to the end of the month. This led to a fall in production capacity of 20 million cubic meters of gas during this period.

It is worth noting the atypically high temperatures in Europe, which lead, on the one hand, to a rise in demand for electricity, for air conditioning, and, on the other hand, to a reduction in hydropower generation amid droughts in some regions, notably in France.

Moreover, according to the association WindEurope, wind generation in the European Union remains below the norm, which is usually 11-20% in summer. On August 15, the share of wind power generation was 9.5% of the total. This factor could also increase demand for gas.

We previously reported that Oil prices fell again at the start of Monday’s trading

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Commodities

Natural gas prices in Europe exceed $2,600

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Natural gas price

Natural gas prices on the London Stock Exchange ICE record rose to more than $2,600 per thousand cubic meters for the first time since early March, according to the site.

At the time of publication, the September futures on the Dutch TTF hub were worth 250.395 euros per kilowatt-hour, or $2,693.17 per thousand cubic meters.

The sharp rise in the cost of gas in Europe on the exchanges is because there is a full shortage of this: gas, supplies from Russia have been reduced, LNG is expensive on the international market and it can not fully replace the supply of Russian gas, expensive petroleum products and coal.

The increase over the last 24 hours was 13.75 percent. The rise in gas prices is due to the abnormal drought in Europe and the interruption of Russian fuel supplies. The latter are now running at 20 percent of standard capacity.

We previously reported that Saudi Aramco sees no strong impact on its position in Asia.

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Commodities

Oil is getting cheaper — What’s going on in the commodities market?

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oil is getting cheaper

Oil is getting cheaper. Oil quotes are falling Tuesday night due to concerns about slowing global economic growth and weakening demand for fuel.

It became known the day before that growth in retail sales and industrial production in China in July was weaker than analysts’ forecasts.

Retail sales rose by 2.7% year-on-year instead of the expected 5% growth. China’s industrial production growth slowed to 3.8% last month from 3.9% in June, while analysts’ consensus forecast was 4.6%.

Is oil getting cheaper? Why It’s Getting Cheaper

To support China’s economy, the People’s Bank of China injected 400 billion yuan (nearly $60 billion) into the financial system as part of its medium-term lending (MLF) program and also cut the rate on one-year MLF loans by 10 basis points, to 2.75% per year.

“This unexpected decision gave the impression that the central bank was concerned about the scale of the weakening economy,” wrote Commerzbank (ETR:CBKG) analyst Carsten Fritsch. — In our view, problems in the real estate sector, combined with a zero-tolerance coronavirus strategy, are likely to continue to weigh on the economy in the short to medium term, meaning it will be a persistent negative factor for oil prices.”

October Brent futures on the ICE Futures Exchange in London had fallen $1.10 (1.16%) to $94.00 per barrel by 5:56pm Moscow time.

At the same time, quotations for WTI futures for September at NYMEX decreased by $0.98 (1.10%) — to $88.43 per barrel.

We previously reported that oil prices have stepped up their fall.

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