Energy: Oil rebounds in the face of growing supply risks
ICE Brent is now trading convincingly above US$100 a barrel, having settled over 4% yesterday. The market seems to be getting more and more nervous in the face of growing supply risks from Libya. This is after fighting broke out in the capital, Tripoli, in recent days. So far, there have been no reports that this fighting has impacted oil supplies. However, with Libya pumping around 1.2 million barrels/d, the market is somewhat nervous about potential supply disruptions. Although, given the volatility of Libyan supply in recent years, one would think that there was already some level of risk premium in the market.
Additionally, market participants may be reluctant to sell the market at this time, given the uncertainty surrounding the September 5 OPEC+ meeting. Especially since the Saudi energy minister has declared that the group could be led to reduce its production, with a dislocation between the physical market and that of paper. Since then, a number of other OPEC members have backed the Saudi comments. So potentially the next meeting could be quite interesting, although it will be difficult to justify lower production as Brent trades above US$100/bbl. However, we continue to believe that a potential intervention by OPEC+ provides a floor for the market, which is not too far below recent lows.
Natural gas prices in Europe came under heavy pressure yesterday. TTF is down almost 20%, although prices are still trading above 270 EUR/MWh. Following the rise in prices, it seems that there has been some profit taking. From a fundamental perspective, little has changed to justify the scale of the move. Although given the uncertainty and limited liquidity in the market, prices are expected to remain trading at high levels with high volatility. Reports that the European Commission will come forward with a proposal to address the significant strength we have seen in electricity prices across Europe may have contributed to the weakness. Any action that caps electricity prices will limit the profitability of burning gas for electricity generation, which could eventually result in lower gas demand. At present, ignition spreads offer little incentive to destroy gas demand from the power generation sector.
Finally, Russian gas flows along Nord Stream are scheduled to stop tomorrow (August 31) for three days of maintenance at a compressor station. The market will be watching eagerly if streams restart once maintenance is complete. Currently, Nord Stream is operating at only around 20% capacity, and Gazprom has said flows will return to those levels once the work is complete. If the flows restart at the indicated time, it could lead to a further drop in European prices in the immediate future.