Oil is still struggling as it doubts that we can avoid a recession, but it is getting support from the ECB which unlike the Fed refuses to pause on hiking interest rates. The European Central Bank raised its key interest by 25 basis points on Thursday to 3.5% and ECB President Christine Lagarde warned of more rate hikes to come. She is warning of upside inflation risks that include potential renewed upward pressures on the cost of energy and food related to Russia’s war against Ukraine.
When she raises rates, she may raise the upside risks of inflation as the Euro currency is soaring and the dollar plummets. That is not helping the cost of grains either that is not only seeing prices spike due to the falling dollar but growing concerns about the emerging US crop that is fighting off the worst drought conditions at this point of the season in about a decade. Many grain analysts think it is critical that we get a rainy forecast over this Juneteenth holiday weekend because if it comes out hot and dry, that could blow the top off global grain prices. The world is counting on the US farmer to keep the world fed with global grain stockpiles near historic lows and the risk that Russia might not cut a deal to allow Ukrainian grain exports is getting scary.
China seems to be fearing the recession. Chinese leader Xi Jinping is getting a lot of pressure because the economy continues to struggle and people still have a bad taste in their mouths after getting locked in their houses during the COVID-19 panic. A headline from the Chinese state council says stronger measures needed to boost the economy in response to changing economic conditions should give oil another boost. The funny thing is that even as China’s economy supposedly struggles, their import and refining of oil still is near all-time record highs.
Also, reports of tension between Saudi Arabia and Russia over oil production might be overplayed. Russia expects its oil production to be down 400,000 bpd in 2023. Saudi Arabia is praising production cuts to bring stability to the global oil market.
The bottom line for oil and gasoline is that there are still significant upside risks to the price. Rumours of a deal with Iran probably won’t matter because Iran is already exporting about as much oil as it can. We see supplies tightening in the next few months pretty dramatically so make sure you get your hedges on.
Why did we see a smaller-than-expected 84 Bcf last week? The answer my friend is blowing in the wind, the answer is blowing in the wind. Scott Disavino at Reuters mentioned that the reason that many analysts have been missing natural gas predictions is wind or lack of wind. He pointed out that the wind is not blowing in places that rely on wind like Texas. He said traders should look at the EIA at the “ELECTRIC GRID MONITOR” and look at power generation by source and remember to not go against the wind.