EU Energy Market Stress Supports WTI

A series of events have come together to push up natural gas prices, in the latest sign that energy markets might be coming under stress and keep crude prices on the upside.

The Canary in the Crude Mine

Ever since the start of the war in Ukraine, the European gas market has been under extreme stress, making it more vulnerable to potential signs of issues in the energy supply market. Europe's reliance on imported LNG means it is the first to see the possible effects of supply issues. The ongoing war in Gaza has led to Israel shutting down a major gas field and endangered exports from Egypt, which go to Europe. Not surprisingly, earlier this week, the spot price of the benchmark TTF natural gas peaked above €51MW/h, the highest it's been since the winter. Gas supply concerns seem to have overweight forecasts of milder weather in Europe ahead of the winter, allowing inventories to be better than historic levels at this point in the year.

Stikes at Chevron's LNG facilities in Australia had contributed to supply worries, generating high fluctuations in the natural gas prices in Europe. Although an agreement has been reached that would put to rest fears on that front, another concern popped up with reports of a damaged gas pipeline between Finland and Estonia, potentially escalating tensions if the damage is deliberate. The incident shows how vulnerable energy supplies are in the current heightened geopolitical moment. Prices in crude jumped on Wednesday after an explosion in a hospital in Gaza, with Israel and Hamas blaming each other, and increased concerns that the conflict might escalate as a meeting in Jordan of Arab leaders and US President Joe Biden was cancelled. But recent headlines of the US lifting sanctions on Venezuelan oil for six months have weighed on prices.

Stateside, Prices Are Rising

The US has become the world's largest LNG exporter, thanks to now being the largest supplier to Europe, as the continent struggles to replace Russian gas. Increasing prices of natural gas would be expected to drag up the price of crude as flex capacity plants switch to cheaper energy sources. As Europe is also the largest importer of US crude, the energy demands of the EU could continue to put upward pressure on WTI, mainly if there are further interruptions to supply through the Middle East.

On the flip side, the higher crude prices put pressure on finding new supply. With the US 'spilling' Venezuelan oil to the market, though, OPEC+ might be more motivated to curb production unless prices remain elevated. Most of Venezuelan oil exports have been directed to China, which may be diverted to the US and the EU now, leaving China the remaining largest importer of Russian crude.

Crude Still in Uptrend

Crude has slid after peaking near the 138.2% reverse Fibonacci of the $63.70-$84.74 leg at $92.50 a barrel but remains above the swing low of $77.60 and recently re-entered the upward channel guiding price action. If the retest at $85 forms strong support, the commodity could receive a boost to the next Fibonacci shy of triple digits, at $97.80. Conversely, failing to defend the support will open up the lower support and increase the chances of a move to the 50% Fibonacci retracement at $75.50/bbl and, less likely, the golden pocket.

Source: SpreadEx

Key Takeaways

The conflict in Ukraine and potential deliberate damage to European gas pipelines has made Europe more vulnerable to supply issues, with the war in Gaza causing Israel to shut down a major gas field and threatening exports from Egypt adding to concerns. Strikes at Chevron's LNG facilities in Australia have also contributed to supply worries, leading to fluctuations in natural gas prices and increased crude prices. As the largest exporter of LNG to Europe, the US is expected to be affected by the rising prices, while the higher crude prices may put pressure on finding new supply. However, the US lifting sanctions on Venezuelan oil could impact prices, as most of the country's oil exports have been directed to China.