Written Commentary
CRUDE OIL
While the economic outlook for the US (and indirectly for US oil demand) shifted slightly negative with US inflation reports yesterday, reports of liquidity injections in China from the PBOC should improve Chinese energy demand prospects. Furthermore, Chinese oil company Unipec reportedly purchased 10 million barrels of crude oil from the UAE and there are other signs China continues to ramp up crude imports to supply its refineries. While significant increases in Chinese refinery activity into the end of 2022 were reportedly an attempt to capitalize on global shortages and very favorable crack margins, the trade now sees the increase in refinery activity as a sign domestic fuel demand is picking up speed. Overnight supply data from the API was patently bearish to crude oil with a significant 10.5-million-barrel weekly jump. A similar outsized jump in EIA crude oil stocks later this morning will likely catapult the EIA year-over-year crude oil surplus to levels likely to spark significant headline coverage of burdensome US supply. Therefore, WTI prices should falter relative to Brent crude pricing especially with the IEA overnight indicating Russian crude exports in January increased by almost 300,000 metric tons on a month over month basis. In a minimally positive development, Russia has indicated they will increase oil export duties next month, possibly a move to increase tax revenues for the war even though that could reduce overall sales volumes. According to Bloomberg sources Russia could get over $8.1 billion of additional revenue from the increase in export taxes.
NATURAL GAS
While European temperatures are forecast to turn cooler, and the beleaguered Freeport LNG export facility is generating output, those developments merely make a stronger case for holding up prices, as opposed to sparking short covering gains. However, without a very significant bullish fundamental shift, we doubt speculative bargain-hunting buyers will accept significant risk for what should be limited and brief reward from bounces. In fact, to end the downtrend and allow for a noted short covering bounce probably requires a forecast of sustained arctic temperatures on both sides of the Atlantic. Unfortunately for the bull camp the bear camp has several developments working in its favor from overnight with reports of reduced Chinese gas demand reducing supply tightness in Europe and news that Gazprom gas flows to Europe through the Ukraine are now at the highest levels of this month. Therefore, the best the bull camp can hope for is a continued sideways consolidation pattern, as temperature forecasts into the end of the month are not threatening, especially given the buffer of supply in both the US and euro zone. Not surprisingly restarting of the Freeport LNG export facility has probably discouraged some sellers, but it could take a significant series of very bullish developments to provide a case strong enough to scare the bears.
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