By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA
Stock markets in Europe turned lower again on Wednesday while US futures are more mixed, similar to what we saw in Asia overnight. Conditions remain choppy in the aftermath of Jackson Hole last week.
There’s clearly a lack of conviction in the markets following a lot of hawkish central bank commentary in recent days. The narrative that investors want to believe is that inflation has peaked and is falling in the US and that a soft landing is plausible. That doesn’t necessarily align with what we’re hearing.
Add to that the increasingly hawkish language from other central banks amid severe economic headwinds and the reality of the situation is seemingly becoming impossible to ignore. With 75 basis point hikes now on the table for the US, EU and UK next month, among others, it may not be entirely surprising that investors are taking a more cautious stance.
ECB paying the price for dragging its feet amid record inflation
The inflation data from the eurozone this morning won’t have hurt the odds of a 75 basis point hike, that’s for sure. Inflation in the bloc rose 9.1% in August, up from the previous record of 8.9% in July. With core inflation also jumping to 4.3% from 4%, the pressure is seriously mounting on the ECB to be more aggressive. The central bank is paying the price for its decision to leave the deposit rate at -0.5% for as long as it did and may have to be much more forceful now as a result. Price pressures are becoming more widespread, with energy increases easing slightly but food, alcohol and tobacco inflation accelerating to 10.6%. The inflation situation is, unfortunately, going to get worse, perhaps much worse, before it gets better considering what’s to come with energy this winter.
Gas flows halted, nervy few days ahead
Gas flows through Nord Stream one have now paused for the three-day maintenance period. While Europe is keen to stress its storage levels are well ahead of schedule, the failure of flows resuming on Saturday would be a massive blow ahead of what is already going to be a nervy and expensive winter. European gas prices are near their recent highs and will likely remain so over the coming days until flows resume. If they don’t, prices could rise much further.
Oil edges lower but Saudi comments are still supportive
Oil prices are a little lower again for a second day after spiking earlier in the week. It’s a little indicative of the mood in the rest of the markets at the moment and the lack of certainty. Prices jumped earlier in the week as traders weighed up the potential for supply disruptions from Libya and Iraq, while the threats of production cuts from Saudi Arabia continued to echo.
They’ve since pulled back amid reports that an OPEC+ cut is not under consideration next week and as broader risk markets turned south. Economic concerns remain and may ensure trade continues to be volatile. API also reported a small inventory build on Tuesday, while a small draw is expected from EIA later today. Given previous comments from Saudi Arabia, any significant pullback from $100 may be challenging.
Gold is on the decline once more
Gold is slipping again on Wednesday, this time aided by the dollar which is rallying once more. Traders are becoming increasingly convinced that the Fed will hike rates by 75 basis points next month, despite the improvement in the inflation data. The message is finally getting through from the Fed and barring another significant improvement in August and/or any sign of slack appearing in the labour market, it may now have to deliver.
It’s worked so hard to convince traders that it must continue tightening aggressively that to then only do so by 50 basis points would seriously undermine trust in its communication and guidance. Policymakers have backed themselves into a corner and may now have to deliver. With $1,730 now broken, attention shifts back to $1,700 and $1,680.
Can bitcoin hold out much longer?
Risk assets are struggling in the aftermath of Powell’s speech at Jackson Hole, the only exception arguably being bitcoin which fell heavily in the immediate aftermath but has now found its feet. In fact, it’s posting gains of more than 1% today, bucking the trend we’re seeing elsewhere, with risk assets generally underperforming. Once more we’re seeing resilience in bitcoin around $20,000; the question is how long can it hold out if sentiment doesn’t improve?
Oil Prices Surge as China’s Holiday Demand and Tight US Supply Drive 2% Weekly Gain
Oil prices to close the week with about a 2% gain as robust holiday demand from China and constrained U.S. fundamentals overshadowed concerns about potential supply increases from Saudi Arabia.
Brent crude oil, against which Nigerian oil is priced, gained 5 cents to $95.43 per barrel at about 6:00 a.m. Nigerian time on Friday while the U.S. West Texas Intermediate crude (WTI) rose by 16 cents to $91.87 per barrel.
The market’s resilience became evident as it rebounded from a slight 1% dip in the previous session when profit-taking followed a surge in prices to 10-month highs.
China, the world’s largest oil importer, played a pivotal role in driving prices higher. Strong fuel demand coincided with China’s week-long Golden Week holiday, with increased international and domestic travel significantly boosting Chinese oil consumption.
Analysts at ANZ noted that this holiday season’s surge in travel was underpinned by the fact that the average daily flights booked were a fifth higher than during Golden Week in 2019, pre-dating the COVID-19 pandemic.
Also, improving macroeconomic data from China and the steady growth of its factory activity further supported the bullish sentiment.
The U.S. economy’s robust growth and indications of accelerated activity in the current quarter also bolstered expectations of sustained fuel demand.
Also, tight supplies in the U.S., evidenced by dwindling storage levels at Cushing, Oklahoma, provided additional support to oil prices. As rig counts fell, U.S. oil production was expected to slow down, potentially pushing the market into a deficit of more than 2 million barrels per day in the last quarter.
Investors are now eagerly awaiting the upcoming meeting of the Organization of the Petroleum Exporting Countries and allies (OPEC+), scheduled for October 4th.
The meeting will be a crucial indicator of whether Saudi Arabia will consider stepping up its supply in response to the nearly 30% surge in oil prices this quarter.
Analysts, however, caution that the market may be entering overbought territory, leading to possible hesitancy among participants and concerns that OPEC+ could ease production cuts earlier than planned if prices continue to rise.
The outcome of next week’s OPEC meeting will undoubtedly hold significant implications for the oil market’s future trajectory.
Oil Prices Soar to a Year High as Crude Reserves Plummet
Crude stocks at a pivotal storage hub in Cushing, Oklahoma, hit their lowest levels since July last year, sparking concerns about future supply stability.
Oil prices surged to their highest level in over a year during Asian trading hours, following a significant drop in crude stocks at a key storage hub.
Crude inventories in Cushing, Oklahoma, plummeted to a mere 22 million barrels in the fourth week of September, close to operational minimums, according to data from the U.S. Energy Information Administration (EIA).
This translates to 943,000 barrels compared to the prior week.
The U.S. West Texas Intermediate (WTI) rose to $95.03 per barrel during Asian trading hours, a peak not seen since August 2022 before settling at $94.61 per barrel.
Meanwhile, Brent crude oil, the international benchmark for Nigerian oil, rose by 1.05% to $97.56 per barrel.
Experts have attributed this rapid price escalation to the precarious situation in Cushing, with Bart Melek, Managing Director of TD Securities, stating, “Today’s price action seems to be Cushing driven, as it reaches a 22 million bbl low, the lowest level since July 2022.”
Melek expressed concerns about the challenges of getting crude oil into the market if inventories continue to dip below these critical levels.
Predicting the future trajectory of oil prices, Melek suggested that prices could remain at elevated levels for the remainder of the year, especially if the global oil cartel, OPEC+, continues to enforce supply restrictions.
He noted that the global oil market is facing a “pretty robust deficit” on top of an already significant shortfall for this quarter due to OPEC’s production cuts.
Saudi Arabia, a key player in OPEC+, has extended its voluntary crude oil production cut of 1 million barrels per day until the year’s end, bringing its crude output to nearly 9 million barrels per day.
Russia has also pledged to continue its 300,000 barrels per day export reduction until December.
However, Melek added that, “We do think that prices could keep up near these levels for quite some time. But I don’t think it’s too permanent. And we might have seen the end of this rally.”
Nigeria’s Struggles in the Energy Sector Highlighted as Ghana Nears Universal Access
Nigeria, the most populous nation in Africa, continues to grapple with challenges in its electricity sector, resulting in a significant lag behind its West African neighbor, Ghana, in achieving universal access to electricity.
Ghana, with its population of 34 million, has made remarkable strides in expanding its power sector, attaining an impressive electrification rate of 88.54% with ambitions to reach 100% by 2024.
Ghana’s success story is characterized by its deliberate policy formulation and swift implementation to bolster its power sector, facilitating increased investment and widespread electricity access for its citizens.
Speaking at the Nigeria Energy Conference and Exhibition 2023 in Lagos, Ghana’s Minister of Energy, Andrew Mercer, underscored his country’s commitment to achieving universal access to electricity by the end of 2024.
Mercer stated, “The president of Ghana emphasized the aggressive target of the government to achieve universal access by the end of 2024 from the current rate of 88.54%. This is consistent with the UN Sustainable Development Goal 7 (SDG7), which aims to ensure access to affordable, reliable, and modern energy for all by 2030.”
In Ghana, the total installed energy capacity stands at 5,454 megawatts (MW) with dependable capacity at 4,843 MW, and peak demand reached 3,561 MW in May 2023.
Meanwhile, Nigeria boasts a significantly higher total installed generation capacity of 13,000 MW but only a fraction, between 3,500 and 4,500 MW, is effectively transmitted and distributed to Nigerian homes and businesses.
Tragically, this disparity means that over 80% of Nigerians still lack access to the electricity grid with only around 11.27 million Nigerians recorded as electricity customers as of Q1 2023, according to the National Bureau of Statistics (NBS).
Ghana’s sustained electricity grid stability has resulted from consistent efforts by the government and stakeholders to enhance the nation’s electricity industry, ultimately improving the quality of life for Ghanaians and supporting economic activities.
Both Ghana and Nigeria have increased their reliance on thermal power generation, reducing the share of hydro power generation in favor of thermal sources. However, while Ghana boasts a record of grid stability and minimal outages, Nigeria has struggled with frequent grid collapses.
In September 2023, Nigeria experienced grid collapses on two occasions, disrupting power supply nationwide.
This disparity in grid reliability highlights the challenges faced by Nigeria’s electricity sector. According to data from the Nigerian Electricity Regulatory Commission (NERC), Nigeria recorded a high number of grid collapses in recent years, with 2018, 2019, 2020, and 2021 witnessing 13, 11, 4, and 4 collapses, respectively.
In 2022, there were seven recorded grid collapses, with the most recent occurring on September 25, 2022, when power generation plummeted from over 3,700 MW to as low as 38 MW.
As Nigeria grapples with these electricity challenges, Ghana’s steady progress in its power sector serves as a reminder of the critical importance of comprehensive policies, infrastructure development, and stability in ensuring universal access to electricity for citizens, a goal that remains elusive for millions of Nigerians.
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