Global Commodities: El Niño faces a dunkelflaute

Greg Shearer (0:03)

Hello, and welcome to another episode of At Any Rate. I'm your host Greg Shearer, and I head up Base and Precious Metals Research at JP.

Otar Dgebuadze (0:09)

Morgan.

Greg Shearer (0:11)

So far this week, after a large and steep fall over the last few weeks, crude oil has mostly held steady down slightly on the week. We've seen this, even though we've gotten mixed headlines on the conflict in Iran, which has been the predominant driver around geopolitical risk premium coming in and out of oil. At the moment, at just a touch under $100 per barrel, crude is still trading roughly around where our analysts peg fundamental fair value for the moment. The interesting dynamic, though, I think on energy this week has been on TTF, or European Natural Gas. What we've seen on that front was over the last few weeks since the end of October, a very precipitous fall, something around 20% off the end October highs, which was in line and in sympathy with that risk premium eroding and what we saw in crude as well. But that hit a U-turn this week, where we saw as of yesterday, on Thursday, we saw an intraday price gain in TTF of nearly 10%.

To discuss this, I'm joined by Otar Dgebuadze, who heads up our European Natural Gas. Otar, thanks for joining me. Maybe let's just jump right in.

What are we seeing in this disconnect this week from a TTF versus Crude Oil perspective? What's really driving this turnaround in TTF so far?

Otar Dgebuadze (1:36)

Hi Greg, and thank you for having me. So in TTF market, we've been plugging two key variables influencing the prices over the last few months, and especially as we approach the winter, which has been the supply disruption from the Middle East and the weather outlook and expectations into the winter. Actually, the supply disruptions have eased materially throughout the last few weeks, and as of the latest data that we have looked at earlier this week, we estimate Qatar and UAE utilization is running around 50 percent compared to almost zero throughout the summer.

Throughout the week, we also observed quite a few crossings, which we are verifying at the moment. However, the rates of the price formation have moved to weather. These last few, last two weeks or since November, I would say, and we are observing quite a strong weather event in general, known as Dankel-Flaute, which is a worst combination for energy markets, which is cold and low wind environment.

Indeed, this is an opposite of what we would have typically have expected with El Nino conditions, which in general should be leading to weather being warm, wet and windy. However, this is exactly opposite. So we see less of a lack of wind, lack of rainfall and quite cold temperatures. So in November month to date, we are observing wind generation down about 35 percent year over year. Hydrogenation is down about 50 percent year over year. And at the same time, residential heating demand is up about 30 percent.

This has put pressure on storages, which were already at very low levels to start with. And we also are withdrawing at quite significant pace, especially compared to historical averages at this time of the year. All the demand specifically we are seeing in number of markets, we are seeing demand at seasonal highs since 2022 So for example, demand in the UK for this time is highest it's ever been since 2022 for first half of November. The expectations going forward in the latest weather forecast indicate that the second half of November should be warmer. But obviously this has introduced another more fundamental, I would say, risk premium into the market because the North West European storage is starting at 69%. Our current rate is running at around 64-65%. And we still have four or five months of winter to go.

Greg Shearer (4:04)

OK, thanks, Otar. So an erosion of geopolitical risk premium runs head on into weather risk premium in European natural gas. Maybe I'll take this chance to just pivot us towards metals and give a brief update of what we've seen since the US election results last week.

Focus has primarily been on gold and copper. What we saw was actually gold, which has been sitting just above a key support that sits between 3,800 and 4,000, actually got a bit of a post-election relief rally. What we saw was we initially sort of popped up, broke back above $4,000 per ounce. And this, in our view, was primarily quite encouraging initially of holding this very, very important technical range. And it was driven by a bit of a backup in expectations of bedhikes as well as rates, which were coming on the back of a mixed power that is going to be taking over in Washington from July. Even more encouragingly, I think, was last Thursday when we had a significant tech inequity route and gold held steady, which has not been the case more recently. But that is run head on into this week into a more significant pullback to once again retest this very significant technical level. If we really begin to break this down, why we track interest rates so closely when we're looking at gold is really the opportunity cost of gold, a yieldless asset versus something like a treasury node or treasury bond. But what we've seen this week is that gold has stumbled once again to really test this key technical level. The main culprit is once again, Fed expectations and interest rates.