​Gas-Weighted Degree Day

Bespoke Weather Services said its outlook updated Wednesday showed a decline in gas-weighted degree day (GWDD) expectations. The forecast pointed to modestly lower projected demand over the remainder of the trading week, however, forecaster have that  strong heat continues to permeate much of the Lower 48. At this point, the 15-day forecast as a whole is just a few GWDD over the five-year normal so the weather pattern right now is fairly neutral. Having said that, the East continues to see occasional strong spikes of heat, while the South, especially Texas, is not seeing anomalous heat.

The National Weather Service data showed hot high pressure over the East Coast with highs in the 90s across several major markets, including Philadelphia and New York City. Even more intense heat scorched the West and Southwest with highs ranging from the 90s to well above 100. However, heavy rains over parts of Texas dampened demand and there was more rain on the radar for Thursday. A separate weather system is expected to move into the Great Lakes and farther east Thursday, bringing comfortable temperatures in the 60s and 70s.

Storm Elsa

According to the National Hurricane Center (NHC), tropical storm Elsa has been lashing western Florida on Wednesday with heavy rains and sustained winds of 65 mph along the state’s northern Gulf Coast.  The storm is expected to turn north-northeast and move up the coast Thursday toward Georgia and South Carolina. The impact of the storm is expected to prove modestly bearish for gas prices.

The risk to production is looking minimal and pipelines in Elsa’s path have not posted any notices related to the storm as trading got underway Wednesday, according to analysts. There isn't any major production in or around the projected path and the storm missed the producing areas of the Gulf of Mexico according to analyst.

​Natural Gas Production

Production on Wednesday held slightly above 90 Bcf, which is off recent highs around 92 Bcf. This was offset, however, by lower LNG volumes. LNG feed gas levels on Wednesday hovered around 10.9 Bcf, according to estimates, down a tick from the previous day. It was also below the 11-plus Bcf threshold that had effectively become the norm over the spring and early summer amid robust demand for U.S. exports from Europe and Asia.

The European natural gas market has seen the storage deficit versus the five-year average grow to 660 Bcf, which is up approximately 100 Bcf over the past month. With supplies tight and prices in Europe notably higher than in the United States, natural gas futures will need to gain more than $5/MMBtu for economics to lead to shut-ins of U.S. LNG exports.

U.S. Energy Information Administration

Attention is now turning to Thursday U.S. Energy Information Administration (EIA) natural gas inventory report. Ahead of the report, covering the week ended July 2, most estimates were running notably below the five-year average for this time of year. Injection estimates in a Bloomberg poll landed a median of 29 Bcf. Predictions ranged from 19 Bcf to 47 Bcf. Results of a Reuters survey, meanwhile, ranged from injections of 22 Bcf to 64 Bcf, with a median build of 29 Bcf. NGI’s model predicted a 28 Bcf build, which would come in well below both the 57 Bcf year-ago injection and the five-year average build of 63 Bcf.

Weather Outlook

Looking to next week, forecasts show highs in the 90s or above for much of the Lower 48, indicating strong national demand ahead. This includes early peaks above normal levels with low to mid-100s in Salt Lake City and Sacramento and low 110s in Las Vegas, accroding to forecasters. They also expect sustained heat in the East in mid-July.

US Job Openings

US job openings have hit a new all-time high of 9.21mn in May, up from a revised 9.19mn level in April, with hirings continuing to lag well behind at just 5.93mn. What does this tell us? Well, it shows that there is huge amount of excess demand for workers in a market with continuing labour supply constraints. This presents the risk of more upward pressure on wages and more persistent inflation in the US economy.

The challenges of finding wokers is a continuing theme in recent months and this has been highlighted in the June ISM manufacturing and services reports. Employment components were both moving into contraction territory despite surging orders and production. In addition, the National Federation of Independent Businesses reports that 46% of small business owners had job vacancies they could not fill, which was down slightly from the previous month’s all-time high reading, but more than double the 48-year historical average of 22%. What does this tell us? It points towards a situation that could put the brakes on growth simply because companies cannot expand as planned.

The Federal Reserve has a view that the labour market will be more balanced from September as childcare issues ease with schools returning to in person tuition. In addition, expanded unemployment benefits will stop and this should help to make jobs more financially attractive and entice people back to employment. 

Increasing Pay Pressures

Companies are looking to take advantage of the reopening and stimulus driven economic growth. This means expansion plans are in play but recruiting new staff is proving to be a challenge. Therefore, companies are increasing pay to attract staff. This was reflected in a new all-time high for the proportion of companies raising compensation as measured by the NFIB. This is putting pressure on companies on two fronts because they not only  need to raise pay to attract employees but also pay more to retain existing employees. This will fuel inflationary pressures and keep inflation higher for longer, which ultimately, could prompt the Fed to raise rates sooner.

This rally was primarily driven by dry weather in Brazil and the resulting deterioration in the crop.  Sugar cane likes warm, moist weather for optimal cultivation. In addition to the dryness, falling temperatures in late June have caused concerns that Brazil’s cane crop has been damaged further. Add frost into the equation and the crop is under even more stress. Farmers and traders will be monitoring the weather and the condition of the crop closely to ascertain the extent of the damage. Consequently, harvesting may pick up the pace which may indicate a decline in yield.

Last year, the 2020-21 season, Brazil exported 32 million metric tons of sugar, around half of global exports. For the current 2021-22 season, the USDA sees those exports dropping by approximately three million tons.

Lets turn our attention to the crop in Asia beacuse it may take a hit too. Thailand and India were the second and third-largest exporters last year, and they could see their crops damaged by a possible drier monsoon than usual later this month. If this happens, then we'll start to see the impact in later July. This is a concern because these two countries account for 21% of global exports.

We also need to take into account the orice of cruide oil as this will be a key driver of sugar prices. Brent oil has recently hit $77 on strong demand and tight supply as well as the recent disagreements in OPEC and it allies. Last weekend, the Organization of Petroleum Exporting Countries failed to reach an agreement on increasing oil-production quotas, sending shock waves through the market for crude.

The cane harvest in Brazil doesn’t only go toward making sugar as some of it is used for conversion to ethanol, which oil refiners blend into gasoline. When oil prices are elevated, some refiners switch to ethanol for use in gasoline blends to reduce costs. Consequently,  that increased ethanol demand boosts demand for sugar, helping to support higher sugar prices. Historically, there is a correlation between higher oil prices and higer sugar prices.

|The sugar markets are relatively thinly traded which means we could see some rapid price movement. In weather markets, forecasting can be tricky and if you add in the geo-political landscape, it becomes even more of a challenge. However, the odds look to be in favor of higher sugar prices at this time.

So how can we play the sugar market? Bullish sugar traders can buy October-dated sugar No. 11 futures contracts on the ICE Futures U.S. exchange. However, not all traders want to pay the ICE exchange fees so an alternative is to purchase the Teucrium Sugar exchange-traded fund (ticker: CANE), which tracks prices of sugar futures.

The deal would see the group increase supply while also extending its pact until the end of next year. However, after two days of talks, ministers have not been able to reach an agreement and have halted negotiations until Monday. The UAE agreed that OPEC+ should raise output by 400,000 barrels a day each month from August and that the market needed this. However, they wanted the OPEC+ supply agreement reached in early 2020 to be treated separately. They stated that the decision to extend the deal unitl the end of 2022 was unnecessary to take right now and that there was plenty of time to discuss this at a later stage. Under the 2020 deal, the UAE has a baseline production figure of 3.2 million barrels a day. 

OPEC+ ministers are set to reconvene on Monday. A failure to reach an understanding risks sending crude prices even higher. Demand is rising faster than supply as major economies reopen from the coronavirus pandemic.

Oil analysts and traders are looking at the numbers and wondering whether the production increases on the table will be enough to balance the strong demand as we head into the summer. Some analysts are considering prices heading north of $80 a barrel and possibly to $100 a barrel if OPEC don't raise output next month.

The UAE has made large investment in their production capability and they are keen to realise a return on that investment, hence why they a driving for a higher production quota. The UAE is leaving about one-third of its production capacity idle, a higher portion that other members of OPEC.

Their production surged to a record of more than 4 million barrels a day in April last year during a brief supply war, when cooperation between Saudi Arabia and Russia collapsed. However, prior to this, the country had only ever pumped more than 3.2 million barrels a day on average twic, in November and December 2018, the two months before the OPEC+ deal set its baseline at that level.

The strong increase in global copper smelting activity during May across all regions dropped off in June as China entered the seasonal maintenance window. However, global activity levels during the month remained well above the lows seen earlier this year, with small month-on-month increases in North America and Europe, and small decreases in South America and Asia excluding China.

The copper global activity dispersion index averaged 48.0. for the month, which is a small decline on the 49.4 of last month. The Activity Dispersion Index is a measure of capacity-weighted activity levels observed at smelter sites where a reading of 50 indicates that current activity levels are at average levels. Readings above or below 50 indicate greater or lesser activity levels than average, respectively. 

The China copper index fell to 47.0 from 48.9, as idle capacity rose to the highest level since last June, due to maintenance periods. Asia excluding China exhibited a similar profile to China, with activity levels falling to 48.2 from 51.5, again due to higher idle capacity. North America has been the slowest region to recover and only registered a relatively weak 38.9 in May, however, there was an improvement on previous periods, but this was sustained in June with an average 46.0. Europe's activity readings came in at 49.1 in June, an improvement on May’s 45.7. South America had been the standout region in May with a reading of 59.2 but has declined to 53.9 in June.

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​The unexpected turn of events leaves consumers uncertain as to whether OPEC+ will turn on the taps in let more oil flow to the market and ease the current tight oil supply and rising prices. It also tarnishes the reputation of OPEC+ as central bank of crude oil.

Earlier on Thursday, OPEC and its allies appeared to have an agreement in principle to boost output by 400,000 barrels a day each month from August to December. It would also have extended the duration of the OPEC+ deal, setting the final expiry of the cuts in December 2022 instead of April.

That preliminary agreement was put on hold by the United Arab Emirates which said it will block the deal until the baseline for its own cuts is adjusted, effectively raising its production quota. This could open Pandora's box as other members could demand production increases which would ultimately flood the market with too much oil.

The UAE’s cuts are measured from a starting point in 2018, setting its maximum capacity at about 3.2 million barrels a day. Expansion projects have since raised that number and the country wants its baseline reset to about 3.8 million barrels a day. The UAE argues that the change is necessary because, under the current terms of the OPEC+ deal, it is making proportionally deeper cuts than other members. They say that this unfairness would persist for even longer if the accord is extended until the end of 2022.

Russia and Saudi Arabia, the leaders of the group, rejected the UAE’s request. Talks will resume on Friday, allowing time for consultations at higher levels of government. So right now, the market is in hurry up and wait mode.

The production index actually rose to 60.8 from 58.5, which was a surprise given the well publicised supply chain issues hitting the sector. However, the fact is the manufacturing sector is struggling to keep pace with the scale of demand. New orders continue to flood in as indicated by a 66.0 reading while the backlog of orders continues to surge, although at a slower pace than in May. This means supplier delivery times continue to lengthen with customers increasingly desperate for stock as indicated by another steep contraction in their inventories.

Labour Shortages

Employment actually fell into contraction territory (49.9) whcih was unexpaected given the strong demand. WHat this tells us is that manufacturers can’t find workers to fill vacancies. Consequently, in order to hire and retain employees, companies will probably have to increase their pay rates to attract candidates. Companies are already paying more for everything else with the prices paid component hitting its highest level since 1979. In the short term, labour is likely to add to those cost increases.

Labour shortages may become less of a constraint from September as childcare issues ease and expanded unemployment benefits come to an end, but there is no guarantee given evidence to suggest potentially more than 2 million people have taken early retirement in the past year. Consequently this could lead towards a longer period of elevated costs for employers as they attempt to find suitable employees.

Given the backlog of orders and customers getting frustrated with low inventory numbers, manufacturers increasingly know they have pricing power and can pass higher costs on. This all adds to the case for higher inflation that is likely to be more persistent than the majority at the Federal Reserve acknowledge with the case building for a 2022 first interest rate hike.

Residential Construction

Residential construction rose 0.2% while non-residential contracted 0.7%. This was the the 15th fall in the past 16 months – given the uncertainty over the need for office space and constraints on local government spending. Residential remains very strong though, with output up 28.2% year-on-year. It's a similar story to that of the manufacturing sector in that there are supply constraints, the cost of materials and the ongoing problem of finding workers. Consequently, there is a higher probability of seeing the rate of activity slow. With strong demand for new homes, house prices are likely to keep rising at double-digit annual rates through the rest of the year.

U.S. Oil Demand

The strength of the U.S. oil demand recovery is underpinned by these record rate drawdowns and this is just ahead of talks between OPEC and it's allies on Thursday to negotiate a potential output increase.

As the U.S. emerges from months of lockdowns, Americans are taking to the roads and skies in increasing numbers. Earlier this month, California, America’s most populous state, re-opened its economy, while New York ended most of its lockdown restrictions. To meet demand, oil refiners boosted crude processing to levels to pre-pandemic levels. 

Supply Outlook

The global supply situation looks set to remain tight as OPEC and its allies have yet to come to an agreement on how much shut-in oil to return to the market. That has delayed preliminary talks between ministers by a day to allow more time for a compromise before Thursday’s discussion. The International Energy Agency has warned of supply deficits in the second half of this year unless OPEC acts fast to add more crude. 

Crude oil stocks in Cushing, Oklahoma, the delivery point for WTI futures, are at the lowest levels in over a year. Indeed, some analysts are forecasting that these stock levels will drop to multi-year lows by the end of the summer.

At the same time U.S. drillers have been slow to respond to higher oil prices, which are up more than 50% so far this year. Domestic crude production is holding at roughly 15% below peak levels seen early last year. 

Spreads

Looking at the Nymex calendar spreads, we can see that the September West Texas Intermediate futures contract has increased to $1 a barrel premium over October for the second time this month. This suggests that the market is expecting ongoing supply tightness through the summer. Prior to this month, the spread between the second month and third month WTI contracts hadn’t exceeded $1 a barrel since 2018.

Overseas interest in American crude oil has also been climbing despite a bumpy recovery from the health crisis in Asia and Europe. Exports of U.S. crude remain strong even as rallies in WTI have narrowed its spread relative to the global benchmark Brent, to less than $2 a barrel.

​The gas market has long been segmented between geographical regions, but the ramp-up in new supply of liquefied natural gas (LNG) and growing liquidity in spot trading over the past several years has helped transform it into a global market. This evolution comes at a price, as Europe and North Asia now compete for a finite supply of LNG, which results in bidding wars that can cause spot rates to surge.

Supplies are already very tight  coming into the summer months and this could get worse if there is a cold winter. Currently, there is strong competition between Europe and Asia and that is driving prices higher. European gas inventories are the lowest in more than a decade for this time of year, with the region’s benchmark surging to the highest in almost 13 years, while rates in the U.S. and Asia have jumped to the highest seasonal level in years.

There have been surpise developments in China too as they are set to become the world's top importer of LNG for the first time this year, overtaking Japan. China is stockpiling supplies of LNG in order to power its booming economy and help it shift away from dirty fossil fuels such as coal. The demand from China over the last few years has outstripped even the most bullish analyst estimates. 

But as we've seen, the LNG market is very competitive between Asia and Europe and Asian end users are increasing prices to attract supplies away from Europe. Consequently, Europe’s end-users have been forced to depend more on Russian pipeline supplies. Yet Gazprom PJSC’s unwillingness to ship extra gas via Ukraine has been one of the key factors for surging prices at the Dutch Title Transfer Facility, the spot benchmark for Europe, to the highest level since 2008. Analysts see TTF prices continuing to rise through 2021 with strong demand.

The sitatuation is exercerbated by the energy demands caused by extreme weather. Last winter in Asia was bitterly cold and now there are heat waves in Western U.S. as well as severe droughts across the globe that are reducing hydro output. 

With these factors in the melting pot, and memories of record-high prices in the Asian spot LNG last winter, importers in China, Japan, South Korea and Taiwan are buying up shipments for delivery between Novemeber and February. Chinese importers got their knuckles wrapped last year for not being prepared enough so it is highly unlikely they'll want a repeat of that.

The Japanese government last month asked utilities to ensure stable fuel supplies this summer and winter amid forecasts for abnormally thin power reserves. Traders at Japan’s biggest importers said that they have been under more pressure to stock up on fuel and even restart retired gas-fired power plants.

In the U.S., Henry Hub futures prices have more than doubled over the past year to the highest seasonal level since 2014. Inventories are 5.8% below normal for the time of year, the widest deficit since 2019 on a seasonal basis, signaling tighter supplies for next winter.

Shipping restraints could also add to supply issues this winter with the chances of congestion in the Panama Canal running high. This will force U.S. LNG cargoes enroute to Asia to take a longer route around the Cape of Good Hope or the Suez Canal, which again, will limit availability. 

Can these supply issues will resolved ahead of time? If the Nord Stream 2 pipleine is started early, then this could help to avoid a supply crunch and add much needed supply to Europe. However, the pipeline that connects Russia to Germany has been plagued with delays because of U.S. sanctions. Currently, the pre-commissioning work is underway but there are no guarnuntess of this pipeline being completed in time.

Of course, the weather has the last say in this and if there are milder winters across the globe, then inventories will go further. However, we'll have to wait and see on that front. In the meatime, it is highly probable that supply will remain tight for several years as the industry  makes up for the lack of new supply investment in 2020 and the market catches up with strong demand.