Equities are rallying back from yesterday’s weakness – most are pointing to the eventual reopening of the Nord Stream 1 pipeline as one of the sources of renewed risk appetite. UST yields are generally higher, but the 2s10s curve remains firmly inverted, suggesting recession fears have not simply gone away. Still, there has been a massive multi-level sigh of relief across global capital markets that Russian gas will flow back to Europe, triggering a convincing recessionary dubbed bear market relief rally.


Recessionary fears and dollar strength have been a headwind for commodities, but oil prices, in particular, have been hurt. So far this week, the US dollar is a bit softer, and deep EU recessionary concerns have eased, helping both risk sentiment and oil prices lift as short positions have unwound and fresh buying has returned to oil markets.

Boots on the ground have reported Nord Stream 1 will restart on Thursday, but at a level below the total 160mcm/d capacity. As a reminder, the pipeline was operating at 40% of capacity pre-maintenance and following the turbine dispute in June, so this is viewed as good news from a risk perspective.


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But oil is higher as fundamentally the market remains undersupplied, with OPEC suggesting the shortfall next year could be up to a million barrels a day which is relatively unprecedented and signals higher prices ahead.

While OPEC tends to err on the bullish side, the curve backs up its message: there is a shortage of physical barrels, with spot barrels much more expensive than forward barrels despite the balances looking bad into next year. Hence traders are taking advantage of that backwardation, selling puts or buying calls on deferred contracts that are much lower than the spot and could provide attractive payouts, all things being equal.

Refined products have a similar curve shape with strong backwardation. Typically, a lot of diesel flows to Amsterdam and into Central Europe. But since the Russian invasion of Ukraine, there has been less gasoline and diesel supply out of the Baltics.

People have been switching out of Delta 1 products – just being long the futures or long via the index – into options because of the sharp pullback. They have changed from being completely exposed to the downside to exploring it via options, tending towards buying calls, call spreads, and selling puts.

China is always a big worry. It has a solid energy security policy and is building domestic stocks. It is buying cheap barrels of Russian crude because it is one of the few countries that can. It is processing those and creating gasoline and diesel, preventing its refiners from exporting. It may change policy and give the rest of the world diesel and petrol.

China’s growth story is unlike the rest of the world, where growth reemerged after covid. China’s growth has been slow to return because it has not gotten out of a lockdown. Still, month-over-month demand is slightly better, but it is by no means consuming as much as it was.

The base metals market correlates more to China’s growth than the oil market. Each time there is disappointing China news flow, base metals have led the complex lower. There is lower attendance at factories and delays in building the country’s infrastructure – China still has the Belt and Road Initiative, but lockdowns directly impact that.


Gold seems to be the odd person out, not participating in any broader relief rally, a weaker US dollar or the 2’s 10’s curve staying inverted. Central banks’ front-loaded rate hikes tarnish the gold markets’ glittering appeal.


Base metals have been elevated for much of this year but are now back at ‘normal’ prices, having sold all that way off. If the world is at an average level of demand, then base metals are in deficit, so higher prices are warranted. Looking at curve shapes on base metals, a significant amount of backwardation has disappeared. It is still there out towards the longer dates of the curve, but at the front, there is some real softness in that forward curve. There has been a return to the default position for aluminum and copper, which is contango.


While markets are still on edge around recessionary, USD experienced a period of weakness Tuesday, primarily driven by a Reuters report suggesting the ECB is considering a 50bp hike on Thursday. And beaten down $ bloc risk betas had a rare day in the sun after risk sentiment jumped on reports the Nord Stream 1 was set to resume gas flows to Europe.

Originally published by Stephen Innes, Managing Partner, SPI ASSET MANAGEMENT