Energy markets finding a footing

• Despite heavy selling to start the year in the energy markets, energy stocks are proving to be resilient.
• The push factors of China and supply loss are overcoming the drag of the economic outlook, higher US supply, and unseasonably mild weather.
• Despite energy markets falling considerably from their June 2022 highs, energy stocks have only retreated modestly and are now finding some support.

Energy finding a footing

After heavy selling to open the new year, energy driven lower by warmer weather over the European continent and supply issues over the globe unravelling is finding a bid.

The US natural gas benchmark future, Henry Hub, is 3% higher at the opening of trade for the week, and seaborne international crude marker Brent is 0.75% higher at Monday’s open.

Renewed energy demand

Winter temperatures returning to the mean in Europe and North America will likely boost gas consumption in these markets.

North Asia continues to be subject to elevated imported natural gas prices as they raise a bid to pull cargoes from Europe.

Stubbornly high employment is propping automobile and aircraft oil product demand already contending with Russian supply displacement on Western markets.

The Chinese reopening draws on the reorganised Western supply chain and puts a floor under crude oil and oil products markets. Markets have fallen back in recent months as the rewiring of supply matched the present demand.

China’s great reopening

The relaxation of COVID-19 movement restrictions in China is seeing a surge in travel to and from the country as impatient travellers reunite with friends and family after a multi-year separation.

Anecdotal evidence of COVID-19 vaccination tourism is serving to ballast the energy markets as another driver to sustained levels of travel from China.

The surge in visitors has Thailand concerned over an imported COVID-19 wave. Immigration authorities responded by temporarily reinstating vaccination barricades before U-turning following protests from tourism industry lobbyists.

Seemingly the world is now reading from the same song sheet, and nothing will stand in the way of the great reopening.

Energy stocks

The S&P/ASX 200 Energy index ASX:^AXEJ (XEJ) has drifted lower from the start of December 2022, down by 5.5%.

XEJ is 2.5% higher than at the close on the 5th of Jan.

European utilities are frantically searching for replacement cargoes for displaced Russian coal, thus supporting Australian coal, the best-performing basket of companies within XEJ. The Newcastle coal price is well supported at the $400/MT handle.

The German government’s extension of mandates for coal-fired power generators is seeing plans for expansion in German coal mining: something unimaginable just 12 months ago.

While the government and business lobbyists battle the environmentalists, Australian coal suppliers will continue to serve the markets the best they can and provide fuel to the XEJ.

Outlook

Australian energy stocks Indian summer rolls on. Despite some unseasonably mild weather in Europe facilitating ample inventories combined with souring economic outlooks, the rebound of Chinese consumer demand and Russian energy displacement is proving too great a lever to market prices.