Written Commentary
CRUDE OIL
Crude oil traded to a new low for the move overnight but has managed a rebound to unchanged on the session. China’s crude oil imports in November were above October and above a year ago, and that along with news of relaxed Chinese Covid restrictions have given a mild boost to prices. While one can debate the outlook for Chinese energy demand in the months ahead, it is difficult to argue against the view that crude oil prices have fallen precipitously. Adjusted into the low overnight, January crude oil had fallen $5.45 from where they were when the last COT spec and fund position was within striking distance of the smallest net long since August 2016. On the other hand, embargoes and price cap measures have failed to impede Russian supply flow onto the world market. Even when it appears that the price cap is hindering supply flow (reports yesterday indicated 10 tankers carrying CPC crude are being delayed going through the Bosporus because of the December 5 price cap agreement), the market finds little speculative buying interest. After the close yesterday, the API report showed US crude oil stocks declined 6.4 million barrels last week, which was a much larger decline than expected. Fundamentals for crude oil are likely to remain supportive from strong refinery demand, but the heart of the energy bull market could be yanked out if the high refinery operating rate begins to build US product supplies aggressively.
NATURAL GAS
Despite its precipitously decline from the late November highs, natural gas has yet to return to levels seen at the launch of the Russian incursion of Ukraine. The trade does not appear to think that the extreme cold in Europe will significantly draw down near-capacity storage levels. But with the technical condition extremely oversold, the trade could become more sensitive to bullish weather in the weeks ahead. According to some sources, the Freeport LNG export facility has mechanical functioning in place and is waiting for authorization from the US government permit department. Despite the rebound overnight, the bias remains down with weather stories tossed aside and the markets seeming comfortable extracting premium injected by concerns about severe supply tightness. While this may be a wild speculation, it is possible that the natural gas trade sees Russia failing in the war and a major supply threat eliminated. However, Putin does not appear to be the type to give up unless he is forced out.
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