The Commodities Feed: China omicron concerns

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Brent finished last week up about 5% WoW on the back of mounting supply concerns. However, we have started this week on a weaker footing. Both Brent and WTI are trading lower in the early morning session in Asia. Covid developments in China are not helping sentiment. Tianjin has begun city-wide testing after two local Omicron cases were detected. While we see other countries adapting to live with Covid, China clearly continues to pursue its zero-covid policy. This is a risk to oil demand since China is the largest crude oil importer in the world. We are also approaching Chinese New Year, a time when there is normally plenty of domestic travel, and so any domestic restrictions will weigh on oil consumption.

However, for now, the market is still mostly focusing on supply dynamics. Even with supply, however,  we are starting to see an improvement. In Libya, output has reportedly returned to 900Mbbls/d after maintenance work on pipelines. The maintenance work had led to a fall in production of 200Mbbls/d. While in Kazakhstan, clearly there is still plenty of uncertainty and so it will remain a risk to supply. That said, the Tengiz oil field, which initially adjusted production due to logistical issues, is now gradually returning production to normal levels.

The supply concern which is not going to disappear anytime soon is OPEC spare capacity. There are only a handful of members that have the capacity to increase output, whilst others are failing to meet their agreed production levels due to disruptions and lack of investment. This is evident when looking at OPEC production levels for December, where OPEC members within the deal increased output by 150Mbbls/d, against a possible output increase of 250Mbbls/d.

The European natural gas market came under pressure on Friday with TTF falling by around 8.6%. This follows news that the Groningen gas field in the Netherlands may increase output to 7.6bcm in the current gas year, up from an earlier estimate of 3.9bcm.  This is on the back of stronger demand as well as a delay in the start-up of a new nitrogen plant in Zuidbroek.