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Supply concerns to dominate in gas markets

European natural gas prices surged this week on renewed supply concerns, as Russia once again cut gas supplies to Europe and the US Freeport LNG export facility closed for six months. The huge price move emphasises how volatile natural gas prices can be, particularly in the current environment when global supplies are tight. High volatility is likely to persist as news on gas flows develops but we’re forecasting the European natural gas price to remain high, ending the year at €120 per MWh. Meanwhile, the financial market backdrop has become less favourable for commodity prices. Global monetary tightening and concerns about global growth have hit risky assets like equities and non-energy commodities this week. Genuine supply concerns are keeping prices of certain commodities elevated, but there is the potential for large price falls if some of these fears ease or prove unfounded. Next week, we don’t think there is much chance of a cut to China’s Loan Prime Rate, to be announced on Monday and the published agenda for the National People’s Congress Standing Committee doesn’t indicate that any extra financing for fiscal support will be discussed. Without significant stimulus, we think that soft demand from China will weigh on industrial metals prices this year.
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Lockdowns are only part of China’s subdued demand

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Supply concerns to dominate for some time yet

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Waiting for clarity on the EU’s oil import embargo

A persistent theme in energy markets is uncertainty about the outlook for the EU’s imports of energy from Russia. It does appear that some sort of embargo of oil imports will be announced, maybe as early as next week. However, this is not new news and is unlikely to spark a renewed surge in oil prices. Meanwhile, there have been no reports of payment problems for natural gas this week, suggesting that Poland, Bulgaria and Finland will be the only European importing countries losing access to Russian gas for now. OPEC+ holds its monthly meeting next week and we expect it to leave policy unchanged. At some point, the group will have to discuss how to manage falling exports from Russia and what it means for OPEC+ production targets. But, so far, the group has shown no inclination to acknowledge the change in Russia’s circumstances. Elsewhere, metals markets will probably take their lead from China PMI readings for May, due mid-week, and China trade data due the following week (9th June). We expect the PMIs to rebound a little from April lows, which would be positive for metals prices. This will be last Weekly Wrap until Friday, 10th June as Capital Economics’ London office is closed on 2nd-3rd June for the Queen’s Platinum Jubilee celebrations.

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