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Oil (WTI-Oct Exp) soared to a 7-year high of 83.87 early Monday on the global energy crisis and no additional production hike by OPEC+. Oil jumped almost +21% in September and October (till day) on the growing global energy crisis amid transition to green energy without adequate alternative mechanism. Global bond yields jumped amid the concern of stagflation as energy prices skyrocketed. Both Natural Gas (NG) and crude oil made multi-years high amid higher demand (even before winter) and supply bottlenecks (too fast transition to the green energy initiative).
Europe is in chaos on energy disruption. Oil was also boosted on higher demand for an alternative source of energy instead of LNG amid skyrocketing prices. Although NG stumbled after Russian (Putin/Novak) jawboning (assurance of higher supplies to Europe despite high domestic requirement, oil continues to surge higher amid a shortage of thermal coal in power generation and as many power generators also shifted from expensive LNG/coal to ‘cheap’ oil.
Further, on Monday, oil jumped as U.K. and European NG prices surged almost +18% on Monday after Russia’s Gazprom dashed hopes for additional supplies next month, despite hints from Putin/Novak that more could be forthcoming. All focus was on the NG pipeline capacity auction held Monday for evidence of increased supplies from Russia, either through the Ukrainian pipeline or lines passing through Poland to northwest Europe. But the auction results were identical to September and thus almost unchanged flow expected in November too. Russia may be using energy as a ‘weapon’ to accelerate the approval of Nord Stream 2, but approving the new pipeline could also ease the energy shortfall in the EU significantly. Also, as per Russian news agency TASS, Europe didn't ask Russia’s Novatek to raise LNG supplies.
In any way, continental Europe is heavily dependent on Russia for its NG supplies, especially during harsh winter. But last week, Russia’s deputy energy minister Grabchak said Gazprom would continue filling domestic storage facilities until 1st November, which shows that contrary to Putin’s political rhetoric, Russia was in no rush to divert more supplies to Europe at the expense of its requirement. At the same time, surging demand for LNG in Asia has increased global competition for LNG cargoes, making it more difficult and expensive for the U.K. and EU member states to compensate for Russia’s reluctance to supply additional quota.
Oil was also buoyed as over the weekend Iraq's Oil Ministry noted that prices above $80 are a positive indicator. But oil was also undercut as Iran may resume nuclear negotiations from 21st October. Meanwhile, data shows that OPEC+ compliance with oil cuts fell slightly to 115% in September; as the cartel raises production targets, but some members like Angola and Nigeria are still falling short as they face challenges in pumping more oil amid maintenance issues and subdued oil capex.
As a reminder, the OPEC+ has raised its output targets by 0.40 mbpd in September and is also set to rise further in October and in November by the same +0.40 mbpd. Last week, Saudi Arabia, defended the policy of gradual production cut tapering despite calls from major consumers like the U.S., India and China to supply more as prices skyrocketed.
Saudi energy minister ABS said last week:
What we see in the oil market today is an incremental (price) increase of 29%, vis-à-vis 500% increases in (natural) gas prices, 300% increases in coal prices, 200% increases in NGLs (natural gas liquids)----- we have done a remarkable job acting as a so-called regulator of the oil market---- Gas markets, coal markets, other sources of energy need a regulator. This situation is telling us that people need to copy and paste what OPEC+ has done and what it has achieved. I keep telling people we are increasing production---- OPEC+ would be adding 400,000 barrels per day (bpd) in November, and then again in the following months. We want to make sure that we reduce those excess capacities that we have developed as a result of COVID----OPEC+ wanted to do it in a gradual, phased-in approach----- while OECD oil inventories were on track to normalize at the end of this year, 2022 was looking a bit of a challenging year---
Technically, whatever may be the narrative, oil now has to sustain over 85 for the next leg of rallies towards 91-100-115 and even 150 levels; positional/weekly support around 77.00 level; only consecutive closing below 77.00, the oil may fall to 63 zones.
Surging oil around $100 would be catastrophic for oil imported economy and the even U.S. as inflation would be out of control, leading to the next leg of economic crisis. Even a release of U.S. SPR may not help much. But Biden may go for the Iran nuke deal to bring oil down (at least psychological factor) before the 2022 mid-term election.
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