Written Commentary
CRUDE OIL
With an 11-day high in the early going this morning we suspect a small measure of macroeconomic optimism is contributing to the modest bullish tilt in crude oil. After the close, the API survey said that US crude oil stocks had a weekly decline of 3.1 million barrels which was a much larger decline than trade forecasts and that is supportive of prices. Other supportive developments include a weekly decline of 1.4% in ARA crude oil inventories and from Saudi Oil Minister comments yesterday indicating that OPEC plus must stay “aggressive” and “preemptive.” Along those lines Bloomberg overnight indicated that Chinese apparent oil demand for November fell by 2.5% relative to year ago levels. While not law yet, the US funding bill currently under consideration would cancel 144 million barrels of US Strategic Petroleum Reserve sales, and that is a psychological support for prices. Another supportive development for crude oil came from Germany where officials indicated the country would not buy “any” crude oil from Russia in 2023. Going forward, the threat against Chinese demand is significant and difficult to discount. On the other hand, some commodity markets have displayed the ability to discount declines in Chinese demand under the belief that the infection flares will intensify, are not going to produce explosive death counts. In a longer-term negative development, an industry forecast released yesterday predicts the US will become a “net exporter” of crude oil next year. The US is already exporting oil at a record pace of 3.4 million barrels per day with other US oil products and gas exports also surging.
NATURAL GAS
While natural gas prices have recoiled from yesterday’s sharp range down extension, bullish fundamentals capable of sparking significant upside follow-through are missing. On the other hand, the massive range down action this week fully discounts the incoming Arctic blast in the US and has seemingly factored in further delays in restarting the Freeport export facility. In a negative development to global gas prices, Chinese November purchases of Russian LNG posted a record which confirms noted flows of Russian supply continue despite embargo efforts. It should also be noted that the Russians have given the go-ahead for shipments to China via the Siberian pipeline with the start of flow personally directed by the Russian president. Not surprisingly, mild temperatures in Europe into the coming weekend should leave inventories high. In fact, European gas prices are lower for a 4th day following reports of near record imports. It is also possible that this week’s aggressive declines are the result of successful energy conservation efforts by European nations. According to Reuters, German gas consumption in 2022 declined by nearly 15% versus 2021 with more energy saving implementations moving into place. While the path of least resistance is pointing down in February natural gas, seeing prices return to the vicinity of price levels in place just before the Russian invasion seems overdone.
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