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Energy

The oil market remains well supported, managing to settle higher for the fourth consecutive day yesterday. The key catalyst for the most recent strength is the supply disruptions from Libya. Libya’s largest oil field, the 300Mbbls/d Sharara field and the 65Mbbls/d El Feel field have been shut due to protestors near the site calling for the current Prime Minister to resign. There are reports that Libyan output has fallen by more than 500Mbbls/d and there is the risk that we see further supply disruptions.  This obviously comes at a time when there is plenty of concern around Russian oil supply, given the Russia-Ukraine war. The specific and most immediate risk when it comes to Russian oil supply is the potential for the EU to include an oil ban in the next round of sanctions. The pressure on the EU to do so is certainly growing, but there is pushback from some EU member countries. Doing so would require a change in trade flows and the need for other producers to step up. However, up until now OPEC members have largely ignored calls for more aggressive output increases. While Russia likely does have some influence over OPEC members, given its part of the broader OPEC+ supply deal, there is also the question over whether OPEC has the capability to increase output more aggressively. The group has consistently failed to hit its agreed output levels for a number of months, with just a handful of producers, including Saudi Arabia and the UAE, having a meaningful amount of spare capacity.

 As we have seen for quite some time now, the one factor which continues to hold the market back is the Covid situation in China and the impact this is having on demand. Clearly, the regional lockdowns that we are seeing have lasted longer than many were anticipating, and so this will have a bigger impact on oil demand in the short term. This weaker demand helps to reduce the tightness that we are currently seeing in the market. Latest output data from China shows that refiners processed around 13.8MMbbls/d of crude oil in March, down about 2% YoY. In addition, the export of refined product totaled 4.07mt in March, up from 3.24mt in the previous month. Although admittedly still down by around 40% YoY. Given weaker demand, refined product exports could see further upside over April.

While the European gas market has calmed somewhat following the strength and volatility earlier in the year, it is now the US market where we are seeing significant strength. Henry Hub has rallied by more than 38% since the start of February, which sees the market trading not too far away from US$8/MMBtu and the highest levels seen since 2008. Forecasts for colder weather have been constructive for prices at a time when US gas storage is below its 5-year average and also at its lowest levels since 2019 for this stage of the year. Stronger heating demand from both the residential and commercial sectors, increased demand from the power generation sector and stronger LNG exports have helped to draw inventories at a quicker pace this year.  However, with the heating season mainly behind us, the expectation of production growth in the months ahead and limited room to increase LNG exports significantly more, we believe the current strength in the US market will be short-lived. 

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