Written Commentary
CRUDE OIL
While crude oil has not forged a fresh lower low for the move today prices remain near yesterday’s low as if the bias in prices remains down. Important bearish fundamental news flow overnight reconfirms ongoing Russian oil export flow to China and India, a surprise 3.3-million-barrel increase in API crude oil inventories, a decline in Spanish November crude oil imports of 7.2%, bearish option skews and another outflow from the United States oil fund ETF. On the other side of the equation, reports overnight have sparked talk that OPEC plus is monitoring the sharp slide in prices and has recently promised to be aggressive and proactive in supporting prices. A likely sign of slumping Asian demand surfaced following a move by Saudi Arabia to reduce Arab light crude oil prices for Asian customers to 15-month lows. While the crude oil market has generally tracked its own fundamentals, support for crude oil from fear of severe supply tightness in gasoline, distillates, and diesel has been reduced significantly by evidence that Chinese fuel exports have jumped to start 2023. Furthermore, crude oil in ARA storage facilities was reported to have increased by 6.8% versus last week, and that follows recent forecasts of record US oil production in early 2023. Given the sharp slide in prices and comments from the Biden Administration indicating the US SPR would be refilled on returns to the $70.00 to $72.00 range the downside might be limited. Furthermore, energy prices today could be subjected to big picture macroeconomic selling if the takeaway from the Fed December meeting indicates the Fed is steadfast in its desire to hike interest rates in the next several meetings.
NATURAL GAS
While the temperature readings inside Russia are not a direct impact on daily natural gas futures prices, forecasts for temperatures in the center/Southwest of Russia are forecast to be 5 to 10 degrees below normal out to January 11th. The extreme cold could test the resolve of the Russian military and could be a signal of more normal seasonal cold temperatures in Europe ahead. However, the preponderance of fundamental data remains in the bear camp with a German regulator indicating the gas situation is now less tense. While the markets were aware earlier this week of statements from the Russian national gas company Gazprom that shipments to China via the Siberian pipeline continue to exceed daily contracted volumes by 0.5% that demand is already documented. In the near term, a continuation of above normal temperatures in key North American and northern Europe consumption areas should put a formidable lid over natural gas prices. In our opinion, government agencies working with/or against efforts to recertify the Freeport gas export facility might have been purposely delayed to US natural gas and electricity costs down to start the winter. Perhaps the market will temporarily find a value around the $4.00 level, but prices could remain pinned down to that level without a significant change to below normal temperatures in Europe in 2-week forward forecasts.
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