Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Crude and gas pop on Red Sea disruption risk
Ole Hansen
Head of Commodity Strategy
Summary: Crude oil and European gas prices received a boost on Monday after several companies, including BP and Equinor, joined a growing list of shippers who have paused Red Sea shipping amid almost daily attacks from Iran-backed Houthi rebels. While this event will line the pockets of shippers given the prospect for longer journeys and higher rates, the impact on crude oil and gas seems temporary unless the Iran link receives some fresh attention, thereby raising fresh concerns about supply from key producers in the Middle East
Key points
- Crude oil and EU gas prices rose on Monday as shippers avoid the Red Sea route to Europe
- Longer journeys and higher freight prices will benefit shippers of container, crude and fuel products
- Recent short selling supporting a non-fundamental driven bounce in crude oil
Crude oil and European gas prices received a boost on Monday after several companies, including BP and Equinor, joined a growing list of shippers who have paused Red Sea shipping amid almost daily attacks from Iran-backed Houthi rebels. Developments that led London’s marine insurance market to widen the area in the Red Sea it considers high risk, further reducing the passage of ships on the shortest route to Europe from the Middle East and Asia via the Suez Canal.
This being the latest disruption related to the Israel-Hamas war with the Houthi attacks being carried out in support of Hamas, and while it may raise short-term supply risks as ships have to sail around Africa, which will add thousands of miles to their voyages, thereby delaying cargo deliveries, the risk of a lasting impact seems limited at this stage. Also considering the US defence Secretary Austin has announced plans to setup a new maritime task force intended to protect commercial vessels from attacks. An announcement that helped arrest Monday’s rally with some weakness seen today, especially in gas.
The longer journeys will require a bigger number of ships and with freight rates potentially rising as a result, shipowners stand to gain the most from this disruption. Since the news broke on Friday, a global shipping index which tracks the performance of stocks from companies engaged in the water transportation business has jumped 10%. An example being Denmark’s Maersk, one of the world’s biggest owners of container vessels jumped 18%, having been under pressure recently from a global economic slowdown and rising capacity. As of yesterday, some 46 container ships have diverted around the Cape of Good Hope rather than transiting the Red Sea, while another 78 container ships are delayed and waiting further orders before transiting (Source: @typesfast on X).
EU gas remains rangebound with weather the biggest risk
Back to the energy sector which saw the European TTF benchmark gas contract surge by as much as 13% on Monday before reversing lower today. The Suez Canal has emerged as the main route for global LNG trade over the past two years as Europe seeks replacements in the Middle East for pipelined gas from Russia. However, while the closure highlights Europe’s increased reliance on super-chilled gas the outlook for demand this winter stays manageable amid elevated levels of gas in storage, a mild start to the winter and weak industrial demand all weighing on prices. With that in mind spot prices are likely to remain stuck above €30 per MWh with focus on weather developments the main catalyst for a break in either direction.
Crude oil receives a boost from wrong-footed funds
Brent and WTI both in steep declines since late September received a boost from the news BP and Equinor as well as other shippers of crude and fuel products would halt shipments through the Red Sea. Thereby supporting a bounce that started last week when the Fed’s pivot towards lower rates supported a general recovery in risk appetite. Just like gas we expect the disruption to this major trading route to be short term and as long production is not affected the price impact is likely to be short lived.
However, given the involvement of Iran-backed Houthi rebels the risk of escalating tensions cannot be ruled out and together with very weak positioning by funds ahead of 2024 these two developments may signal a fresh low has been set up. In Brent within an arear around $72 that has given support on several occasions since March, raising speculation it could be an invisible line in the sand that OPEC+ producers may try to defend.
As we highlighted in our latest Commitment of Traders update, speculators such as hedge funds and CTAs (commodity trading advisors) cut their net long in WTI and Brent to a 12-year low in the week leading up to last week’s FOMC supported bounce. The selling that took place during the week to December 12 was carried out at volume-weighted average prices (VWAP) below current levels in both WTI and Brent and it highlights the involvement of short covering, potentially telling us the bounce was mostly driven by a technical, more than a fundamental change. The slump to 171k contracts (171 million barrels) from a September peak at 560k contracts, shows what a combination of weakening fundamentals and negative momentum can to do prices and positioning among speculators.
Do note that this group of traders tends to anticipate, accelerate, and amplify price changes that have been set in motion by fundamentals. Being followers of momentum, this strategy often sees this group of traders buy into strength and sell into weakness, meaning that they are often found holding the biggest long near the peak of a cycle or the biggest short position ahead of a through in the market. Given the current weak positioning it will not take much in terms of a change to support a bounce, but with trading activity increasingly closing ahead of Christmas and New Year, the prospect of further gains will depend on the economic outlook into the early months of 2024, and whether OPEC+ will continue to be active managers of supply.
Technical update from Kim Cramer, Saxo’s technical analyst, on Brent and WTI
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