The GERM Report

-Kemp: Contango structure deepens

-Nord Stream may be too advanced to abandon.

Even with a sizeable draw on US commercial crude oil inventories, demand signals didn’t add up to a rally for the price of oil in Wednesday trading. The trend continued into early-morning activity on Thursday, though it may be a bit of a bouncy day given the trove of data on US hirings. Overseas and European manufacturing indices moved closer to the level separating growth from contraction, lending support to the downturn. Elsewhere, the energy markets and geopolitical issues continue to intersect in the form of debates over the second string of the Nord Stream natural gas pipeline.

False positives steered the bulls forward in early-morning trading on Wednesday, though withering demand and chart patterns broke the run. Those issues carried over into Thursday, with Brent falling some 1.9% as of 8 a.m. ET to trade at $43.57 per barrel.

The US government on Wednesday reported sizeable draws on all major commodities, which would usually drive a rally in the price of oil. US crude oil imports, meanwhile, bottomed out, but with two major storms hitting the energy-rich US Gulf Coast, a draw was almost a given. Port activity was shuttered, production platforms evacuated and refineries were all closed in the region last week, limiting inputs. The latest jobs estimate from private payroll processor ADP was way lower than expected too, which helped paint a less-than-optimistic picture about the world’s largest economy. Estimates from the economists at ING find job creation is indeed sputtering out, and non-cash monetary transactions, such as credit card purchases, are dwindling as well. US policy makers are unable to overcome partisan sniping to pass a stimulus, so some of the life support is gone from the US economy.

“It looks as though the recovery is losing some momentum with 4Q GDP growth likely to be substantially lower than the 26% annualized figure we expect for 3Q,” a report from ING read.

Commodity prices were influenced Wednesday by a chart pattern known as a symmetrical triangle, which indicates a breakdown for prices. The Reuters market oracle, John Kemp, noted in his morning email, meanwhile, that the five-week calendar spread for Brent is diving deeper and deeper into contango, supporting the downturn in crude oil prices.

“Spread weakness points to an oversupplied market accumulating inventories in the near-term,” his note read.

In gas markets, there may be a premium building in given the lack of supplies on the market. Loadings of liquefied natural gas from the US Gulf Coast were slowed by Hurricane Laura, and to a certain degree, US LNG is cost prohibitive. US supermajor Chevron, meanwhile, stated it was behind on fixing units at its Gorgon LNG plant in Australia. Closed since May after discovering huge cracks in a production unit, Chevron said the second train at the facility won’t be online until next month.

Without LNG, customers are left to transnational pipelines for supply. The European market learned the hard way that geopolitical issues and energy security collide when trouble erupted between Russia and Ukraine, which hosts a Soviet-era network of pipelines, after Kiev started to pivot toward the EU in the middle aughts. Russian energy company Gazprom’s Nord Stream pipeline through the Baltic Sea to Germany avoided that trouble spot, though the second string of Nord Stream is not without controversy. The advent of US LNG shipments to Europe helped turn the Western tide against Nord Stream, and now Russian meddling is supporting the about face. Russian opposition leader Alexey Navalny is in a German hospital after he was poisoned by a toxic nerve agent, reminiscent of the Kremlin’s poisoning of former Russian spy Sergei Skripal and his daughter in the United Kingdom. Taking on a more assertive stance against Russia’s malign activity, Berlin is rethinking Nord Stream. But with Russia already influential on the energy stage with its role at OPEC, Nord Stream may be too far along to abandon.