Written Commentary
CRUDE OIL
With a higher high in crude oil this morning in the face of very discouraging Chinese economic data, a flurry of central bank rate hikes and a stronger dollar bullish control is evident. While news that China’s November daily crude oil refinery throughput reached a 12-month high is a sign of demand for foreign oil imports, a large portion of that refinery activity was destined for export in the form of products. On the other hand, China is using crude oil and the crude oil consumption for foreign product demand serves to offset softer domestic consumption. In a development that is becoming a “trend” Brent crude oil ETFs continue to see record inflows which is a factor that could help the bull camp sustain control. Two other supportive but perhaps short-term developments are a reduction in Canadian supply to the US and announced delays in restarting the Keystone pipeline. It should be noted that portions of the Keystone pipeline have restarted. The weekly EIA crude oil stock jump yesterday was the biggest weekly inflow in 20 months and that did not discourage the bull camp. Another seemingly ignored and definitively bearish reading from the weekly EIA report was a 5th straight weekly increase in gasoline stocks and the lowest implied gasoline demand reading since early July. In the end, bearish supply news yesterday was apparently overwhelmed by improved 2023 demand forecasts from the International Energy Agency. However, many 2023 demand forecasts think first quarter demand will be disappointing followed by a strong rebound in the 2nd half! According to Bloomberg, OPEC oil forecasts have been consistently better than forecast from the International Energy Agency and OPEC believes that Brent crude prices have found solid fundamental value at $80.00 per barrel.
NATURAL GAS
With the natural gas trade looking beyond recent cold temperatures to this morning’s weekly EIA inventory report, the path of least resistance looks to remain down. Adding into the initial bearish view is evidence that the Russian national gas company Gazprom posted record daily supply flow to China. According to Chinese sources Chinese buyers are securing supply for 2023. In a potential supportive but highly suspect headline overnight the trade thinks the Freeport export facility could still restart before the end of the year. From a technical perspective the January natural gas contract yesterday filled the gap left by the very strong opening early this week and therefore yesterday’s low of $6.337 could be considered initial support today. However, we favor the bear tilt today as the weekly EIA report is unlikely to support the bull case. A limiting factor going forward is news from Bloomberg that French gas consumption between August 1st and December 11th dropped 12% relative to pre-pandemic conditions. From a longer-term perspective we think the US inventory deficit relative to 5-year average storage level is the primary fundamental factor capable of driving prices sharply higher in the coming winter. In other words, US natural gas inventories need to tighten thereby increasing bullish sensitivity to stretches of much below normal temperatures. In conclusion, we give the edge to the bear camp today with the weekly EIA storage report capable of prompting a retest of the $6.00 level in the January natural gas contract.
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