"That Is Going To Build Into A Massive Problem": Sunday Night Thoughts From Goldman's Commodity Desk

With oil soaring, stocks in a tailspin and sheer panic the prevailing sentiment among trading desks on what is another "green" night across Bloomberg terminals...

... below we excerpt some of the hottest takes from across the Goldman trading desk (available to pro subs) as oil is set for its biggest monthly jump ever, while Europe is facing another Ukraine moment in nat gas land. 

But before we dig in, something remarkable: last week, Goldman's Prime Brokerage wrote in its Weekly Rundown note (a must read for everyone) that Materials, Energy (yes Energy) and Real Estate were the only sectors net sold, while Info Tech, Consumer Discretionary and Financials were the most net bought. Oops. Meanwhile, Utilities saw largest risk-on flows on record (long buying > short selling) with risk-on activity in all regions. The sector was net bought after being sold for 7 straight weeks. As for Info Tech, it was the most net bought sector with short covering activity (largest since Jan’21) outpacing long buying.  

For trading - The futures market opens at 6PM EST TONIGHT, options markets usually begin to materialize around 4:00 AM EST, 9:00 AM in London. Precious Metals Vol markets should typically start to be actionable around 2:00 AM EST,  7:00 AM in London 
 
Oil + Nat Gas: What’s the Goldman trading desk view?

Daan Struyven (Goldman Global Co-Head of Commods Research) on Oil: “We see four reasons why the large upside risks to our base case oil price forecast (Brent in the $80s in March and in the high $70s in Q2) are rapidly growing further. We plan to revisit our oil price forecast soon if we don't see evidence for our assumption of a gradual normalization in Strait of Hormuz (SoH) flows starting in the next few days.

1.  Estimated oil flows through the Strait of Hormuz are down 90%. 
2. Redirection via pipelines remains low. 
3. No quick solution to restore SoH seems imminent because most shippers are in a wait-and-see mode while physical risks are high. 
4. Oil prices may need to go to demand destruction levels even more quickly than history suggests -> Today's 17mb/d hit to Persian Gulf oil supply is 17 times larger than the peak April 2022 hit to Russia production.

A reduction in physical shipping risks is likely a necessary condition for a substantial recovery in SoH flows, suggesting three potential paths: i) General conflict de-escalation; ii) Strong US protection for tankers; iii) Iran allowing safe passage of tankers with certain origins/destinations (incl. China).

We think that oil prices would likely exceed: i) $100 next week if no signs of solutions emerge by then; ii) The 2008 and 2022 peaks, if SoH flows were to remain depressed throughout March.”

(for the full note see "Goldman Panics, Expects Oil To Hit $100 Next Week And Reach "Demand Destruction" Levels")

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Sam Dart (Global Co-Head of Commods Research) on Nat Gas: “European natural gas prices (TTF) closer the week up 88% from pre-Iran-conflict levels, 53 EUR/MWh. For context, approximately 20% of global liquefied natural gas (LNG) volumes flow through the Strait of Hormuz, largely produced by Qatar, and no reroutes exist. This flow is 100% halted at the moment, with Qatari production fully down following a drone attack.

We base-case that Qatari LNG production will be restored by early April, and we have accordingly raised our April TTF forecast to 55 EUR/MWh, well into the 45 EUR/MWh (fuel oil) to 71 EUR/MWh (diesel) gas-to-oil switching range because we think increased fuel switching away from gas will be required to normalize European gas storage ahead of the next winter. We have not changed our 21 EUR/MWh 2027 TTF forecast. In a scenario where the Qatari supply shock lasts over 1 month, we would expect TTF prices to rally further to the mid-70 EURs/MWh, where diesel is currently priced, to incentivize further switching. A scenario where the shock lasts longer than two months would likely lift TTF above 100 EUR/MWh to incentivize broader industrial demand destruction across Europe and Asia.”

Given that the ongoing rally in oil and oil products has already left our previous 55 EUR/MWh Apr26 TTF forecast at the bottom of the 55-80 EUR/MWh G2O switching range, this leads us to raise our Apr/May TTF forecast higher into the current oil range to 75/70 EUR/MWh ($26/$24/mmBtu), noting this range will likely continue to move higher in the coming days if there's no evidence of de-escalation of the conflict. We also raise our Apr/May JKM forecast, to $29/$25/mmBtu (from $20/$15), at a positive premium to TTF to help Asia attract enough Atlantic basin cargoes to replace Qatari supply. We expect our revised TTF and JKM forecasts to potentially trigger incremental industrial demand destruction beyond the G2O switching we embed in our balances, although the fact that a significant portion of energy-intensive industry in NW Europe has not recovered since suggests this process might take even higher TTF prices in particular.

Under our base case that Qatari LNG exports start to recover from late March, we don't believe that broader industrial demand destruction will be needed to balance global LNG markets. That said we reiterate our view that, should energy flow disruptions last beyond April, it is likely that TTF and JKM approach 100 EUR/MWh to trigger more widespread demand destruction to preserve natural gas in storage for next winter. Conversely, a quicker de-escalation of the conflict would likely drive a faster drop in TTF back to the coal switching range in the 40 EURs/MWh.

(more in the full Goldman note available to pro subs)

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Jon Yarrow (Co-Head of EMEA + Asia Commodities Trading, Head of European Natural Gas + Power Trading) paraphrased from the GS Weekend Macro Call… on Nat Gas: I am concerned about the scale of the Open Interest (OI) in the options market…. . If we look at the move in the vols that have happened over this week, they have been enormous… I do not think that option position has cleared…. You still have a lot of negative gamma sitting out there in the space… Accordingly, it is very difficult for the market to balance; there just isn't enough supply of Vega to solve that issue….

… When it comes to flat price, Qatar is a very big supplier of LNG, supplying 20% of the global LNG… Taking that out of the mix, we are losing about 10 BCM a month…. That is obviously problematic as we move into refill season for Europe… Northwest Europe already has very low inventories… It has been a cool, but not especially cold, Winter, but we came into this Winter with low inventories and we are exiting with very low inventories…. if we start to lose LNG out of the Atlantic basin, given that Europe is trading at a big discount to Asia, theoretically we could be withdrawing gas from storage across April and May… That may change if we get resolution, but it starts to build into a Winter issue and we are going to go into the Winter with very low storage stocks…. The levers that we used in 2022 in order to balance were switching from gas into oil, gas to coal, and gas to lignite…. Most of them have already been pulled…. even at €52, we are not really losing a lot of demand…. We will lose some demand from marginal energy consumers, but there isn't a lot of oil switching that happens at this level….

…For now, the way we are solving the LNG shortfall from Qatar is by using European storage, of which we have a limited amount…. If this continues for another few weeks, that is going to build into a massive problem whereby Q1 is going to need to rip relative to the rest of the year… At this stage, the market has arguably done the right thing in the short term, but this is really building into a future issue….

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Jerome Dortmans (Co-Head of Global Oil and Products Trading) on Oil: “Although we think it is not feasible to close the Strait of Hormuz, it is probably de facto possible to stop meaningful flows. We're probably already losing 10 million barrels a day of flows through the Straits. This is partially because there are no ship-masters who are willing to go into the Arab Gulf to pick up the oil.

In terms of implications going forward on crude, the market is still underestimating the price impact of what is going on today. If we think this is going to last multiple days or weeks, then, whilst we came into the market with an increased balance sheet of oil supply, which we built in Q4 and to a certain extent in Q1, we can very quickly erode that comfort. The operation could last 2-3 days which is not meaningful enough to get to $90 per barrel, but I think this problem will not just stop, because the disruptive element of the Iranian regime is potentially far more meaningful.

I think the market might take a breather but will by no means get cool as we could be looking at 100mm barrels of curtailment, which should take us to the $80-$90 level. The inability of the market to absorb the shortfall will add premium. If this looks like weeks or months of disruption, it will trade towards $100. The market is undervaluing this situation because, if you look at the dislocation between crude markets, futures markets, and products markets, we are seeing record highs on jet fuels, we are seeing meaningful exponential moves on diesel markets, and we are seeing doubling of freight rates to levels we haven’t seen before – in the rest of the oil complex where specialists are trading, we are seeing a much higher premium.”

More in the full Goldman note available to pro subs.