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U.S. President Donald Trump has kicked off his second term with a bang, launching the most systemic and aggressive makeover of the American government. Trump and his allies have moved at lightning speed to force out longtime civil servants by launching a legally suspect buyout program, firing federal prosecutors who worked on criminal cases against Trump, and even attempting to unilaterally shutter the foreign aid agency USAID.

Trump’s new administrative strategy closely mirrors what Steve Bannon, former chief White House strategist at the start of the first Trump administration, described as ‘flooding the zone’. Flooding the zone is an attempt to disorientate other politicians and the media by announcing so many things in a short period that it becomes impossible to react and formulate a response to everything. And now commodity analysts at Standard Chartered have pointed out that oil markets are showing signs of disorientation in the face of the sheer volume of new policy positions by the Trump administration. According to StanChart, many energy traders have responded to this chaos by reducing their risk exposure.

StanChart says the disorientation is manifesting in unusually low levels of volatility. According to the commodity experts, the 30-day realized annualised Brent volatility clocked in at 16.5% at settlement on 17 February, good for a 6-percentage point w/w decline and just 1.5 ppt above a 15-month low. StanChart says a volatility range of 35-45% might be considered as roughly normal for oil, while the recent 15-25% range is unusually low. It also shows in anemic price action and lack of direction. Realized volatility is now in the lowest 2% tail of the distribution of volatility over the past 10 years.

Oil price changes have been very limited over the past three weeks, especially compared to the situation a year ago. According to StanChart, further disorientation is showing in the tendency of the market to stay close to familiar ranges; for example, front-month Brent has moved through $75.10 per barrel (bbl) on some point intra-day on 11 of the past 12 trading days. Likewise, speculative positioning has fallen back towards neutral, with StanChart’s proprietary crude oil money-manager positioning index falling 9.7 w/w to a +16.7, the lowest level so far in the current year. StanChart says that many traders have lost interest in trading fixed prices since the presidential inauguration and have made a relative shift towards trading on both basisspreads and time spreads.

EU Gas Inventory Draws

EU gas inventory draws have remained unusually high, with daily draws exceeding their year-ago equivalents on 60 of the past 70 days. According to Gas Infrastructure Europe (GIE), inventories stood at 51.76 bcm on 16 February, good for a w/w draw of 5.19 bcm and considerably higher than the five-year average at 3.48 bcm. According to StanChart, were that ratio to be maintained, Europe will finish the withdrawal season with gas inventories at just 37.5 bcm; however, the analysts have predicted that the continent will finish the season with inventories at 40 bcm, leaving 65 bcm to be added by 1 November if the EU Commission’s 90% target is to be met.

European natural gas futures remain volatile, with prices hovering around €49 per megawatt-hour, as traders assess the urgent need to rebuild storage ahead of winter. Last week, Germany, France and Italy came up with a proposal to ease EU gas storage requirements in a bid to normalize the market. Under the current European Commission regulation mandates, all EU nations are required to refill their storage caverns to 90% capacity by November, with interim targets set for February, May, July, and September. EU gas storage is currently under 45% full, making it difficult to meet the requirement of 90% by November 1. That’s well below last year's 67% mark at a corresponding point and the 10-year average of 51% for the same period. The continent’s seasonal draw has been bigger than in the previous two winters due to colder weather, lower wind power generation due to low wind speeds and the termination of Russian gas imports via Ukraine.

However, LNG flows from the United States to Europe and Asia are expected to remain elevated. With Europe’s demand for U.S. LNG likely to remain robust, StanChart has predicted that displaced flows due to the latest China tariffs on U.S. LNG are unlikely to become distressed. StanChart sees the tariffs cutting the flow of spot cargoes to China dramatically, with some flows under longer-term contracts likely to continue, depending on the nature of re-export clauses. The experts have warned that the biggest threat of these tariffs is the economics of future long-term contracts, including contracts amounting to at least 15 million tonnes per annum (mtpa) that have already been signed. However, the U.S. currently provides less than 6% of China's LNG imports, while China accounts for just 6% of U.S. exports. 

By Alex Kimani for Oilprice.com