Market Update: Oil & Gas - August 2016

Oil Rally: Sustainable or Speculation Driven?

Oil prices have risen in the past weeks, with ICE Brent prices topping US$50/bbl briefly. Despite supply and demand fundamentals remaining similar to last month (when oil prices waned), oil prices seem to have rallied due to political factors. Speculation that the oil cartel OPEC will come to a uniform decision to freeze productivity levels has been rife. Due to the complexity and various national interests involved, a cautious approach must be adopted as to the likelihood over such a freeze, particularly since such promises have come and gone previously in the year.

Gas: Narrowing Benchmark Spreads

In a dramatic reversal of escalating natural gas prices since Brexit, the last few weeks have seen US Henry Hub (HH) front-month gas price drop sharply to under US$2.59 per mmBtu. Shaped by a milder than anticipated few weeks and high productivity level in the U.S., price momentum has shifted downwards. Similarly, UK National Balancing Point (NBP) front month prices settled at US$4 per mmBtu in mid-August, bringing the NBP-HH spread to around US$1.34 per mmBtu. The narrowing of the two price benchmarks could thwart ‘trans-Atlantic' price arbitrage opportunities this winter. With US prices expected to grow this winter due to a balancing of supply and demand and colder temperatures, any growth of European gas imports from the US will be dictated by the winter weather in Europe.

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