Written Commentary
CRUDE OIL
We see the bear camp with the edge to start the new trading week as demand destruction fears are not being offset by tight supply signals. Not surprisingly, analysts have begun revising their crude price targets lower with Citi indicating softening demand and “ample” Russian and OPEC supply will pressure prices potentially to “soft floor” pricing at $70 because of strategic stockpile replenishment targeting. In other fresh negatives overnight crude oil stocks in Saudi Arabia (in the latest monthly figures) increased as did Saudi exports. Going forward, traders might expect news from the war and perhaps from Russia (regarding their official response to the price cap) to drive prices without notice. A significant intensifying of Russia’s barrage of Ukraine, increased pressure on both armies from extreme cold and perhaps an increase in domestic opposition to Putin creates a backdrop for price volatility in thin market conditions. We see the markets vulnerable to escalating demand destruction concerns, particularly if China hints at travel restrictions in their coming holidays. Adding into the downward bias is news that hedge funds in Brent crude oil positions pulled down their bullish positions to “3 year-lows”. On the other hand, bullish positioning in WTI instruments increased last week. However, downside action ahead could be moderated given the net spec and fund long position in crude oil has already declined to the lowest level since September of 2016. Crude oil is a physical commodity facing global slowing and perhaps significant slowing in China.
NATURAL GAS
In our view, the temperature outlook for Europe is neutral at best with the lack of significant cold areas tilting the forecast in favor of the bear camp. While we are not certain of the impact on natural gas prices from the war into the end of the year, intensified bombing by Russia, deteriorating conditions on the ground (cold-weather stress) and promises from the Russian government to announce their official response to the crude oil price cap could spark dramatic volatility without notice. Fortunately for the bull camp, the latest positioning report in natural gas shows the market aggressively net spec and fund short. In fact, if prices fall back toward the early December lows, the short positioning in natural gas is likely to become the highest of the pandemic. While last week’s EIA working gas in storage report was not definitively bearish, the US deficit to 5-year average stock levels narrowed to insignificant levels and that does not indicate tight supply in the beginning of the US heating season. However, debate over the restart of a Freeport LNG export facility remains a major issue for US natural gas prices and exports. On the other hand, there are reports of increased vessels destined for loading at the Freeport LNG facility which indicates the company is expected to overcome FERC restart hurdles.
Interested in more futures markets? Explore our Market Dashboards here.
Risk Warning: Investments in Equities, Contracts for Difference (CFDs) in any instrument, Futures, Options, Derivatives and Foreign Exchange can fluctuate in value. Investors should therefore be aware that they may not realise the initial amount invested and may incur additional liabilities. These investments may be subject to above average financial risk of loss. Investors should consider their financial circumstances, investment experience and if it is appropriate to invest. If necessary, seek independent financial advice.
ADM Investor Services International Limited, registered in England No. 2547805, is authorised and regulated by the Financial Conduct Authority [FRN 148474] and is a member of the London Stock Exchange. Registered office: 3rd Floor, The Minster Building, 21 Mincing Lane, London EC3R 7AG.
A subsidiary of Archer Daniels Midland Company.
© 2021 ADM Investor Services International Limited.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The information and comments contained herein is provided by ADMIS and in no way should be construed to be information provided by ADM. The author of this report did not have a financial interest in any of the contracts discussed in this report at the time the report was prepared. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.
