OIL: “UKRAINE SENT AN OFFER TO RUSSIA FOR BOTH SIDES TO HALT ATTACKS ON [...]

• Structural energy moves are driving the EUR 1y1y forward rate toward year-to-date highs. Fuelled by the US/Iran escalation and subsequent threats to Strait of Hormuz transit, intense headline risk makes fading this price action risky without immediate diplomatic breakthrough.
• The EUR 1y1y rate remains heavily bound to TTF natural gas futures - as flagged yesterday - where the front-month contract has surged close to €54/MWh. While today’s soft US CPI has helped moderate pricing slightly, markets still discount ~24bps of ECB hikes by September, with ~41bps of cumulative tightening implied through year-end. Notably, the ERZ6/ERZ7 calendar spread remains anchored near 5bps despite the back up in short rates in recent days - even if a September hike is delivered, the fallout on 2027 curve pricing will likely be contained, keeping near-term risks for the differential skewed lower.
• Natural gas carries a heavier weight in HICP than crude oil, and markets are considering a prolonged curtailment of Qatari LNG flows. This may inject a risk premium into winter contracts especially as European gas storage stood at just 52% capacity on 12 July, tracking below the 5-year seasonal norm of 68%.

The DMO has announced it will be looking to sell GBP5bln of the 4.00% May-29 Gilt (ISIN: GB00BVP99566) at its auction next Tuesday, July 21.

• Adding to the above on core goods CPI inflation (-0.09% M/M) coming in soft by any measure in June, we estimate median core goods inflation of -0.01% M/M after -0.11% in May and 0.00% in April.
• It leaves a weak Q2 (average -0.04% M/M) after a solid Q1 with its average of 0.20% albeit mainly coming from the 0.44% M/M in January helped by start of year price resets (many of the individual series at this level of detail are non-seasonally adjusted) in an increase that had matched the previous peak in June on tariff passthrough.
• Recent core good weakness continues to go against what has been a strong trend increase in the NY Fed’s GSCPI in recent months even if it cooled in June to 1.25 standard deviations above average vs 1.8 in April and March.