Market Insight: Long-Term

Oil prices have continued to rally throughout June, breaking through the important $40/bbl mark within the first few days of the month. Largely positive signals around demand recovery, coupled with materialisation of promised OPEC cuts, are working towards balancing the market. In recent days, oil has lost some ground as second wave virus fears grow, and US oil inventories continue to build. Over $3/bbl has been knocked off front month Brent Crude this week, perhaps highlighting the commodity’s vulnerability given that global storage is brimming. Carbon prices have followed oil and equity markets up to gain 17% over the month. Market signals suggest the product may be heading to overbought territory and so we could see some downside ahead.

In wider news, Germany’s cabinet has agreed on the country’s final Coal-Phase out Act. The act aims to phase out coal-fired generation by 2035. The European Commission will need to approve the act, as part of the plan includes financial deals with coal-fired generators. Whilst the country, which has traditionally heavily relied on coal for power, plans to increase it’s renewables portfolio, the decision to close all nuclear plants by 2022, could see gas demand in the country increase.

Market Outlook

The short-term outlook for the coming weeks is neutral to bullish. Long range weather forecasts are pointing towards a more unsettled July, which is good news for wind generation. The continued slowdown of LNG arriving into the UK will provide some upside for the near end of the curve. With countries such as Australia and the US effectively halting their LNG exports, the potential for increasing Asian demand, related to hot weather, and returning industrial demand we could see even less LNG heading to our shores.

Further ahead, the outlook is bullish. Oil remains above $40/bbl but the continuation of its recovery will depend on the emergence, and severity, of any second virus wave. Extended OPEC+ cuts will also be pivotal. The organisation agreed to extend cuts to the end of July, with de-facto leader Saudi Arabia happy to extend cuts to year end. Russia’s commitment to further cuts is far less clear. Prices may also start to rise as we move out of the depths of summer.

Whilst June has brought price increases, markets are still sitting relatively low so renewals should still be considered. The markets continue to exhibit contango characteristics so advice on fixing out no further than 24 months remains. Alternatively, clients should select a longer-term flexible strategy.