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Commodities market is ‘alternating its focus,’ strategist says

Saxo BankHead of Commodity Strategy Ole Hansen joins Yahoo Finance Live to discuss commodity supply and sentiment, the outlook for winter in Europe amid gas rationing, and where gas prices could go next as the Nord Stream 1 pipeline undergoes maintenance.

Video Transcript

AKIKO FUJITA: Eurozone inflation has jumped to a fresh record of 9.1% in August with the main driver-- you guessed it-- energy prices. Crude oil continuing its slide, though, on ramped up recession fears and the prospect of renewed lockdowns in China. Guangzhou just the latest city to see fresh curbs.

Joining us now is Ole Hansen. He is Saxo Bank's head of commodity strategy. Good to have you on today. A lot to talk to in the commodities space, so let's start with where things are in oil right now. We've obviously been talking a lot about the pullback right now, but where do you see it tracking, given some of the potential supply crunches that we're likely to see several months down the line?

OLE HANSEN: Well, good afternoon from Copenhagen. We are at, I think, the low end of the range that has been established now for the past few months. There's no doubt that this market is alternating its focus between the worries about the demand being hit by a lower growth, driven by central banks' aggressive hiking rates. And on the other side, the supply factors which are still-- I think still very present in the market and which has been supporting the price.

So following Friday's hawkish speech by Jerome Powell at Jackson Hole, we've seen that focus shift back to the worries about demand. But I think it's important. Right now, it's more market driven by the worry about the actual slowdown in demand than the actually-- than actually a decrease in demand. So these things can turn on the plate. We've seen the market drop 10 bucks within almost 24 hours. It also highlights the market, which is currently suffering from a lack of liquidity and declining open interest, which makes this market very easy to move.

BRIAN CHEUNG: Hey, it's Brian Cheung here. So from where you sit in Europe, there's a lot of attention on what's happening with natural gas and high energy prices that are leading to overall inflation. We saw those numbers from Eurostat this morning. There's been a lot of warnings about that dark winter that's going to come ahead. Wondering what your projection is for the continued pressure from the conflict in Ukraine on natural gas prices and then the bleedthrough to overall inflation in the euro area.

OLE HANSEN: Well, it is a serious issue. Just last week, we saw gas price in Europe hit an equivalent of more than 300-- I think more than $400 crude oil, dollars per barrel. And in power, it was more than $1,000 per barrel equivalent. So that just goes to show the extreme pressure that we're seeing on industry and consumers.

And it will have an impact. And we are at the point right now, obviously, where we need to see prices or the impact of these high prices basically killing demand in order to have a more balanced market. So this winter could potentially be very tough.

There is a lot of focus right now over the coming days on this Nord Stream 1 pipeline, which basically comes through Danish territory into Germany. And that will-- that has been closed down for maintenance for three days. We believe it will reopen on September 3. If it doesn't, then obviously, we could see these gas prices skyrocketing again after having actually come down a bit over the past three days.

AKIKO FUJITA: Yeah, I mean, let's talk about that potential scenario. As you said, the expectation is a three-day maintenance. Not necessarily plans in advance, but we've known about this for several weeks, at least. If it doesn't come back online, what does that mean for storage levels? We've heard that several European companies well ahead of the markers they set in place for September at least, but how critical are things going to get?

OLE HANSEN: They will be critical because one thing is the storage level. And even if we max out storage capacity in Europe, we still need to have daily inflows of gas coming into the region because the winter gas demand is just simply so much greater than what we see during, obviously, the summer period. The industrial demand is relatively stable, but obviously, domestic consumption of gas skyrocket, say, if we have a very cold winter.

So with that in mind and with Russian supplies, especially on that Nord Stream running at 20% of capacity, it is paramount important that we continue to see inflows of gas, especially from the US and other gas producing nations. But what we will find as well is that the gas that we've been buying from LNG now, for the past few months, has been at the expense of lower supplies to China, among others in Asia. And we obviously don't expect that to continue. There will be a global competition for gas into the autumn and winter, especially as Asian buyers rev up their demand.

BRIAN CHEUNG: And then lastly here, I feel like the overall big picture is concern about recession in the United States, in China, in Europe. What does all that tell you about demand? Because you kind of painted a picture of what it looks like right now. What is the headwind to demand if it is, indeed, the case that either an inflation induced or a central bank hiking induced recession ends up hitting all of those areas pretty hard?

OLE HANSEN: It will hit the demand. The question is still really how much in terms of price impact it will have because I think there's still important to focus on some of these key commodities certainly from some of the food. We got the corn situation in the US. We got wheat with the Ukraine. We got the metals where some miners are struggling. And we got the whole energy complex, where we got several major producers struggling to increase production.

So I think we may see a slowdown in demand, but overall, I think the price impact is probably going to be limited. And if you are looking at commodities from a longer term perspective, I still see the risk of higher prices in the years to come for several reasons.

AKIKO FUJITA: Ole Hansen, Saxo Bank's head of commodity strategy, appreciate the time today.

OLE HANSEN: Thank you.