Written Commentary
CRUDE OIL
Even though the energy trade remains heavily focused on the potential for “energy demand destruction” technical recovery action is possible today. In fact, a risk on vibe adds to the potential short covering in crude oil early today especially if US durable goods posts a 2nd consecutive monthly contraction as that could temporarily temper aggressive US rate hike expectations. However, internal crude oil market fundamentals remain definitively bearish with demand destruction firmly entrenched because of firmly entrenched global slowing “anxiety”. On the other hand, reports of 3 separate “unprecedented damage areas” to the Nord stream gas pipeline in the Baltic Sea smacks of espionage by the Russians. Just as the Russians claimed the inability to restart a critical gas pipeline earlier this year because of a delayed repair of a critical turbine, the suspicious disruption of gas flow in three locations simultaneous clearly helps Russia ratchet up the pressure on the West.
Fortunately for the bull camp in gasoline, the November contract has displayed respect for the $2.25 level on the charts, the trade expects the US refinery operating rate to begin to decline and the trade must consider the potential for major refinery supply disruptions with a strong storm tracking toward the US. In fact, with a recent fire at a key Indiana refinery reducing supply in an already tight Midwest market, the impact of a slight shutdown of far Eastern US refinery activity could have an outsized impact on prices. This week’s Reuters poll pegs EIA gasoline stocks to build by 400,000 barrels but expects the US refinery rate to decline by nearly 1%. In short, the $2.25 level is likely to hold until the market is assured of a storm track away from key US Gulf Coast refineries.
NATURAL GAS
Projecting the direction of natural gas prices in the coming sessions will be extremely difficult with volatility likely to expand dramatically. The primary force expected to induce volatility is 3 separate highly suspicious leaks in the Nord Stream pipeline under the Baltic Sea and the approach of a hurricane in the Gulf of Mexico. However, in addition to big picture macroeconomic demand destruction selling, the natural gas market remains under pressure because of mild US temperatures and expectations for a moderately large injection into EIA working gas in storage later this week. Fortunately for the bull camp, the approach of hurricane Ian could psychologically threaten US production and transportation for a brief time and might ultimately pressure US prices (from a backup of onshore supply) and lift European prices because supply flow to Europe could be disrupted and that will likely send European prices sharply higher.
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