Written Commentary
NATURAL GAS
The latest natural gas weather forecast favors the bear camp with short-term forecasts predicting temperatures throughout the US to be 2 to 5 degrees above normal. However, colder weather is expected to return to northern Europe later next week. Other fresh negatives for natural gas prices are less near-term buying interest in Asia and Europe overnight. In a potential wildcard event Russian leadership indicates they are close to finishing their Price Cap Response as that could or could not involve natural gas. We also suggest that this week’s EIA storage report should keep pressure on natural gas prices as the US storage deficit to 5-year average storage levels has returned to a very minimal deficit condition. However, US natural gas exports are likely to post a 6 month high given the amount of physical flowing to export terminals. Over the last four weeks natural gas storage has declined 232 bcf. Despite a downward tilt on the charts January natural gas appears to have respected support produced by the bottom of a recent gap at $6.391. However, big picture short-term demand signals favor the bear camp and pushed into the market today we favor the downside.
CRUDE OIL
With many markets rushing to factor in significant global slowing possibly culminating in recession, energy analysts are rushing to reduce crude price forecasts. Not surprisingly, Bloomberg has noted a reduction in Chinese road congestion in a reversal of expanding congestion signals earlier this week which is very likely the result of the Covid explosion. Even supply developments are bearish as India is continuing to import significant supply from Russia at prices under the price cap. Obviously, extremely concerning economic data from China, generally disappointing US data, a stronger dollar and a wave of central bank rate hikes served up outside market fundamental headwinds for energy prices. Fortunately for the bull camp, indications are that China is buying for strategic reserves as industrial production and retail sales readings from China earlier this week foster Chinese energy demand concerns. While news that China’s November daily crude oil refinery throughput reached a 12-month high is a sign of good Chinese demand for foreign oil imports, a large portion of that refinery activity was destined for product exports. On the other hand, China is indeed consuming crude oil and the crude oil consumption for foreign product sales still serves to offset softer domestic consumption. In a development that is becoming a “trend”, Brent crude oil ETFs continue to see record inflows and outflows which is a factor that should increase volatility. However, this week the US refinery operating rate fell by 3.3% which in turn should reduce the call on cash crude oil ahead and therefore the distinctly supportive pattern of declining EIA crude oil stocks has likely come to an end. Going forward, the brunt of visible fundamental conditions favors the bear camp, with several threats against energy demand and lingering pressure from this week’s surprise 10.2-million-barrel inflow to EIA crude oil stocks.
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