Futures have been sucked down in the slipstream of a financial crisis that carries eerie echoes of 2008.
(Bloomberg) — Hello and welcome to Elements, Bloomberg’s energy and commodity newsletter. Today, OPEC reporter Grant Smith assesses the fallout for global oil markets from this week’s banking-led turmoil. To see how commodities giant Glencore Plc is making a fortune from the dirtiest fossil fuel amid the world’s shift to low carbon, read this. If you haven’t yet signed up to get Elements sent to your inbox, you can do that here.
Today’s Take: Oil Bulls Cornered
If the party spirit in global oil markets was already starting to flag this month, yesterday’s debacle may have killed it.
Brent crude futures crashed to a 15-month low on Wednesday, sucked down in the slipstream of a banking-sector crisis that carries eerie echoes of the 2008 meltdown.
Prices have steadied today, but it’s all a far cry from the convivial mood that ushered in 2023.
Back then, China’s grand reopening after years of anti-Covid lockdowns was inspiring predictions of a demand resurgence and price rally. Leading industry voices from trading house Trafigura Group to Goldman Sachs Group Inc. forecast a return to $100 a barrel.
Buzzing industry get-togethers from London to Houston advertised that the oil trade, having survived both the pandemic and the corporate ESG agenda, was back with a vengeance.
But in recent weeks, expectations for a boom have grown more sober.
First, China’s modest new targets for economic growth and a more hawkish tone on monetary policy from the Federal Reserve soured the mood.
Meanwhile, Russian supplies proved stubbornly resistant against international sanctions, helping to tip global markets into a deeper surplus, with inventories at an 18-month high.
Then came this week’s banking fiasco, which at its nadir dragged Brent crude almost to the threshold of $70 a barrel.
There are reasons to believe that — provided the financial turmoil doesn’t mutate into something more nasty — the selloff may be limited. Brent has steadied after this week’s rout, which was compounded by banks that had sold downside price protection scrambling to cover themselves — a vicious feedback loop known as delta hedging.
The market’s underlying fundamentals have also received a fresh bill of health from the International Energy Agency in Paris, which predicts that world fuel demand will close out the year “with a bang.”
Saudi Arabia and fellow producers in the OPEC+ coalition appear to be taking a wait-and-see approach, but if the slump persists they always have the option to shore up the market with a new round of output cutbacks.
Nonetheless, crude’s path back to $100 — which had already grown more arduous — has, with this latest crisis, run into a major roadblock.
–Grant Smith, Bloomberg News
Chart of the Day
A surge in Chinese wind generation helped suppress coal burning in the past two months, a result of capacity additions and gusty weather. Wind-power production in January and February jumped 30% from a year earlier, which, along with rising solar, allowed fossil-fuel plant operators to curtail output. Yet thermal power — the vast majority of which comes from coal — still made up 72% of total generation in the winter months.
Today’s Top Stories
Europe is set to import a record amount of American crude this month, relying increasingly on larger tankers as sanctions on Russian oil upend global trade routes.
Canadian convenience-store operator Alimentation Couche-Tard Inc. agreed to buy almost 2,200 gasoline stations in Europe from TotalEnergies SE for €3.1 billion ($3.3 billion).
Brazil surprised drillers last month with a tax on oil exports. The ensuing clash could damage the country’s reputation as a nation that welcomes foreign investment and respects its contracts, risking $20 billion a year in energy investments.
The European Union is set to stake its claim in the green-technology race with regulation aimed at ensuring the bloc produces 40% of its clean-tech needs in key sectors like solar panels and batteries by 2030.
Charoen Pokphand Group Co. is exploring an initial public offering of its seed and animal-feed business in Thailand that could raise as much as $1 billion, according to people with knowledge of the matter.
Best of the Rest
- The Financial Times considers the climate targets enshrined in the 2015 Paris Agreement and asks: Is 1.5C still a realistic goal?
- The Scholl Chair’s William Alan Reinsch, Emily Benson and Thibault Denamiel assess US and EU green industrial strategies — and the risks of a cycle of mutual recrimination — in this article for the Center for Strategic and International Studies.
- Bird flu has been tearing through animals in the US for over a year. While it has rarely infected humans, America must ensure it’s ready in case that changes, Caitlin Rivers writes in Foreign Affairs.
More stories like this are available on bloomberg.com
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