Written Commentary
CRUDE OIL
With big picture macroeconomic slowing fears, a lack of loosening of activity restrictions in China, a 20-year high in the dollar index an upside breakout in US yields, and overall global psychology deflating with equity prices, energy demand fears are clearly justified. However, crude oil demand fear from China may be overstated with Chinese oil imports in April up 6.6% on a year over year basis. On the other hand, the trade is concerned about Chinese fuel demand. Even though Indian March crude oil imports increased by 4.2% over year ago levels, and India has indicated fuel prices are a severe drag on their economic activity. Fortunately for the bull camp, supply forces remain supportive with more Russian oil buyers stepping away from Russian supply in the face of huge Russian discounts.
While the gasoline market has lagged the ULSD market consistently over the past several months, the market came alive and became the leadership market last week. Furthermore, the gasoline market overnight managed another higher high for the move before falling back from ongoing concern toward fuel demand from the two largest countries in the world (China and India). We suspect support is the result of seasonal marketing chain buying for the coming summer, international arbitrage opportunities and a refinery operating rate of only 88% as that is likely to keep US gasoline supplies in a tightening pattern.
NATURAL GAS
Obviously, the massive reversal range down in July natural gas from its high last Friday (a high to low daily range of $1.00) puts the bull camp back on its heels to start the new trading week. The bear camp should also be emboldened by news that the Russian national gas company (Gazprom) continued to book transit of gas through Ukraine with several days of interrupted flow now on the books. Furthermore, with heating demand in the northern hemisphere falling consistently and European entities quickly filling all storage capacity available, the added gas flow into Poland is a negative for US gas futures prices. However, on the other hand large supply at US export terminals will allow for significant exports, which in turn should keep weekly EIA gas in storage levels from significant seasonal inflows.
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