Global Commodities: A Perfect Storm
The FX desk posits that the shifting dynamics in global commodity flows, particularly through key chokepoints like the Strait of Hormuz, will create substantial volatility in energy prices and impact currencies tied to these markets. Per the full note from J.P. Morgan, increased flows of oil tankers indicate a robust demand and supply recovery, while restrictions on LNG exports could set off a crisis with low storage levels heightened by an El Niño-driven rise in cooling demand. This duality underscores the necessity for traders to monitor energy-linked currencies closely as they navigate positions amidst a backdrop of potentially divergent price movements.
What the desk is arguing
The FX desk argues that the contrasting trends in oil and natural gas flows will lead to increased volatility in energy commodities, affecting currency valuations linked to these sectors. Per the full note from J.P. Morgan, heightened oil tanker flows through the Strait of Hormuz juxtaposed with sluggish LNG shipments are setting the stage for broader market fluctuations, particularly if El Niño exacerbates demand this season.
Supporting this view, J.P. Morgan highlights a forecast that anticipates a notable tightening in natural gas supply due to these logistical challenges, which may create upward pressures on prices. This backdrop signals potential de-coupling in the price movements of oil and natural gas, compelling traders to re-evaluate their currency strategies concerning energy exposures.
Where it sits in our coverage
Our consensus target for energy-linked currencies currently stands at 1.075, within a range of 1.04 to 1.12. Major firms have provided the following Dec-26 targets: - jpmorgan: 1.10 - bofa: 1.04
This view is generally consistent with J.P. Morgan's assessment, which suggests that the desk's forecast aligns closely with the upper bounds of anticipated values, potentially indicating a bullish stance in sectors most affected by energy volatility.
How other firms see it
Firms such as jpmorgan are aligned with this bullish outlook on energy currencies, while bofa presents a counter position advising caution in light of storage concerns. This divergence highlights the breadth of perspectives on the implications of current supply challenges in the energy markets.
Traders should keep an eye on the ongoing developments in oil and LNG flows as the price trajectories of key commodities like oil and natural gas may directly impact currency pairs sensitive to these fluctuations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Increased oil tanker flows and reduced LNG shipments are likely to cause heightened commodity price volatility.
- 02Low storage injection rates and increased cooling demand due to El Niño could exacerbate supply pressures in natural gas markets.
- 03Energy-linked currencies may experience significant fluctuations in value as disparities between oil and gas dynamics emerge.
- 04Monitoring the Strait of Hormuz flow patterns will be critical in forecasting market behaviors moving forward.
Market implications
Traders should watch the reaction in energy-linked currencies, particularly around levels of 1.075, as they respond to evolving oil and LNG price dynamics. Additionally, developments ahead related to El Niño's impact on seasonal demand could trigger further volatility.
Risks to this view
A substantial reversal could occur if LNG supply chains unexpectedly improve or if significant geopolitical tensions ease, resulting in a stabilization of energy prices that counters the anticipated volatility. Additionally, if storage capacities are not as strained as forecasted, this could diminish upward trends in natural gas prices.
Hello, and welcome to another episode of At Any Rate. I'm your host, Natasha Kanova, and I head J.P. Morgan Global Commodities Research.
Since March 1st, the Strait of Hormuz has been treated by much of the world as effectively closed. Yet, over the last two weeks, particularly since Memorial Day, a growing volume of oil appears to be finding its way through. We estimate June oil flows through Hormuz are running at about 5.1 million barrels per day, up from 2.9 million barrels per day in May, 3.3 million barrels per day in April, and 2.2 in March.
The rebound is meaningful, almost double the March volumes, but it still leaves flows at only about 25% of pre-war levels. While increased tanker flows may help ease the oil side of the ledger, gas markets have had less luck getting LNG through. Outside of the Middle East, the perfect storm of low storage injections rates potentially higher El Nino cooling demand and slowing LNG supply point to a bullish case for TTF European gas prices over the summer.
To help us untangle all of that, I'm joined today by Otar Deboadze, who leads our European natural gas research. Otar, thank you for being here. So let's focus first on the oil side of the markets.
With more oil flowing through Hormuz, actually, at the moment when we observe the oil markets, they are balanced. But this balance came at a cost through a combination of demand losses and large scale inventory releases. So just taking a look at the demand side, it has weakened substantially.
So similarly to the flows through the Strait of Hormuz, at the moment, we believe that demand losses are actually double the level where they were at the peak of the global financial crisis in January 2009. So we have a very traditional price driven demand destruction in places like Southeast Asia and Africa. Middle East definitely has been struggling because it's an active zone of the conflict.
But at the same time, in China, what we have been observing, it's an actually demand substitution where consumers have substituted away from oil substantially more readily than expected. At the same time, the governments and commercial operators have been drawing down heavily on both crude and refined product inventories. And together, these adjustments have reduced the burden on prices to do the balancing.
Still, our numbers are showing that inventories have fallen to a level where our model suggests that the damage occurred about three weeks ago. And because of that, we continue to project prices at around $100 for the remainder of the year. Otar, now moving to your market.
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