It was a sea of red across the commodities complex yesterday. The complex was swept up in the risk-off move seen across assets, driven by equities. Whilst lockdowns in Shanghai are slowly unwinding, rising Covid cases in parts of Beijing and the port city of Tianjin have led to some districts going into lockdown, which has not helped sentiment. Further lockdowns in Tianjin is a key risk, given that its port is the largest in Northern China. It is pretty clear that with China’s Covid-zero policy, demand risks will continue to linger. ICE Brent settled more than 2.5% lower yesterday, although it has managed to recover somewhat in early morning trading today.
The EIA weekly inventory report showed that US commercial crude oil inventories declined by 3.39MMbbls over the week, but when SPR releases are taken into consideration then total US crude oil inventories declined by 8.4MMbbls. US commercial crude inventories continue to hover below the low end of the 5-year range, with stocks standing at a little under 421MMbbls, compared to a 5-year average of 488MMbbls. Clearly, without the SPR releases commercial crude inventories would be significantly tighter at the moment. The EIA release will also do little to ease fears over a tightening US gasoline market. US gasoline inventories declined by 4.78MMbbls, leaving them at around 220MMbbls, the lowest levels seen at this stage of the year since 2014. Gasoline stocks on the US East Coast are looking even tighter, with these at their lowest levels since 2011 for this time of the year. While refiners have some room to increase runs (utilization rates increased by 1.8% percentage points to 91.8% over the week), gasoline demand should increase as we move into driving season, which suggests that we will see further tightness in the US gasoline market. In this case, we are likely to see further pressure on the US administration to try rein in gasoline prices.
Chinese trade data shows that refined product exports remain under pressure. Diesel exports over April fell 80.6% YoY to 530kt. This was also 20.9% lower than levels exported over March. Whilst domestic fuel demand in China has been weaker due to Covid related restrictions (which would have increased domestic inventory levels), exports have been held back by reduced export quotas for refined products. Gasoline exports also declined in April, falling 33.4% YoY to 980kt. A reduction in Chinese exports has been a key driver in the tightening that we have seen in refined product markets across the globe. And this reduction in Chinese exports is more likely structural (with China wanting to drive consolidation within the domestic refining industry and cut emissions), which suggests that the tightness in refined markets is unlikely to disappear anytime soon.
The UK gas market was also unable to escape the broader pressure across markets. Although, weakness in NBP is likely due to a well supplied domestic gas market, particularly when compared to continental Europe. Prompt NBP is trading at more than a US$6.5/MMBtu discount to TTF. UK gas storage is almost 92% full, well above the 5-year average of around 25%. Stronger storage numbers are due to robust LNG imports that we have seen this year. Although, to be fair the UK has very limited gas storage, working storage only meets around 1.5% of annual consumption in the UK, whilst in the EU working storage covers 26.5% of annual consumption. Strong LNG imports and limited storage capacity in the UK has meant that we have seen strong gas flows to continental Europe via the interconnector and BBL.
The EU carbon market came under significant pressure yesterday, with the Dec-22 contract falling by more than 7.7% to settle at EUR84.64/t. Whilst the European Parliament’s environmental committee vote on Tuesday was supportive, Commission proposals to sell EUR20b worth of allowances from the Market Stability Reserve (MSR) weighed heavily on the market. These funds would be used to help fund the EU’s REPowerEU plan. Although, the move is a bit strange when you consider that the EU is moving closer towards agreeing on increasing the rate at which allowances are reduced every year, yet the Commission is proposing a large release from the MSR.