By Ole Hansen, Head of Commodity Strategy at Saxo

Ole Hansen

The Bloomberg Commodity Index (BCOM) traded higher for a third week as it continued to recover from an early January selloff that was driven by the IMF’s global recession warning. Gains were broad, although the energy sector was being weighed down by continued weakness in natural gas as prices slumped to their lowest since June 2021. In the coming weeks, the risk to supplies of Russian fuel products may add an extra layer of support for gasoline and not least diesel, thereby providing enough support to keep crude oil shielded from recession-related demand fears.

US natural gas slumps to April 2021 low on ample supply

Global natural gas prices continue to slump with heavy losses seen on the futures markets this month, as ​ a combination of ample supply and mild winter weather reduced demand for heating. While the European TTF benchmark gas contract has lost 30% this month – and is currently trading near a 16-month low close to €50/MWh ($16/MMbtu) – US natural gas has slumped below $3/MMBtu to its lowest since April 2021, mostly on healthy supply as daily production continues to exceed 100 billion cubic feet (bcf). This has resulted in smaller than expected weekly storage reductions with the latest weekly withdrawal of 91 bcf being less than half the seasonal average of 190 bcf. In addition, Freeport LNG’s long-shut LNG export plant in Texas has started receiving small amounts of pipeline natural gas as it prepares to reopen after an explosion last June removed 20% of US export capacity.

Brent crude stumbles ahead of $90 but support remains firm

Crude oil trades near unchanged on the month and while recession risks remain and, in some places, have strengthened, the market has managed to find support from an expected increase in Chinese demand and supply concerns related to the February 5 introduction of an EU embargo on Russian seaborne sales of fuel products.

Once the EU embargo on Russian seaborne fuel exports kicks in, we are likely to see prices for gasoline and especially diesel remain supported by tightening supply – not least if the embargo is being followed up by a $100 per barrel price cap on diesel, a level that is some $30 below current market price. Russia may, however, struggle to offload its diesel to other buyers, with key customers in Asia being more interested in feeding their refineries with heavily discounted Russian crude, which can then be turned into fuel products selling at the prevailing global market price.

Supply of diesel to Europe from the US and the emerging refinery hub in the Middle East may make up some of the missing barrels from Russia, but a shortfall seems likely, not least considering the prospect for a strong recovery in China leading to lower export quotas. In addition, the recovery in jet fuel demand will pressure diesel yields, thereby creating another layer of support for distillate cracks on either side of the Atlantic.

Brent is currently trading within a $9-wide up-trending channel within a medium-term downtrend, both offering firm resistance in the $89-$90 area. A breakthrough is likely to send the market higher towards the 200-day moving average, currently at $97.50. Ahead of channel support at $80.35, some support is likely to be provided by the 21- and 50-day moving averages, currently around $83.50. ​