Written Commentary
CRUDE OIL
While April crude oil has avoided a lower low for the move early today, technical and fundamental signals remain bearish. Certainly, the market is deriving support from signs of improvement in the Chinese housing sector, but a 9.8-million-barrel build in API crude oil stocks from yesterday afternoon furthers fears of exploding US crude oil inventories. Therefore, this week’s Reuters poll projecting EIA crude stocks to increase by 1.2 million barrels is likely to be understated and the year-over-year surplus should continue to “balloon.” Furthermore, macroeconomic sentiment this week has been very negative and stoked fear of soft energy demand outside of China. In fact, Morgan Stanley has turned short-term bearish toward crude oil from expectations of higher-than-expected Russian production. On the other hand, Russian crude oil loadings from the Black Sea have been interrupted because of adverse weather and Russia indicated yesterday it plans to cut oil exports from Western terminals. In retrospect, energy prices fell sharply yesterday despite predictions from Morgan Stanley that global oil demand would grow by 36% this year and that highlights the lack of interest in bullish fundamentals. A portion of the weakness in oil prices is likely the result of deteriorating global sentiment as signaled by big declines in equities. In a possible indirect measure of soft US gasoline demand, US implied gasoline demand readings from the EIA have held under year ago and 5-year average levels every week this year except for one reading in late January.
NATURAL GAS
While we understand the threat of a broad US winter storm yesterday might have inspired shorts to bank profits and exit, cold temperatures are not in the 10-day forecast and US consumption is highly unlikely to stop the decline in prices. However, with the low in April natural gas yesterday at $2.113 and recent natural gas rig drilling activity falling to multiyear lows, the case for a bottom is improving slowly. As indicated yesterday, the long-shuttered Freeport export facility is winding up export activity but not expected to reach capacity levels until next month. Therefore, we expect LNG exports to recover but at an incremental pace. On the other hand, US LNG exports have shown recent improvement without the Freeport contribution and that could also help form a low soon but certainly not produce sustained upside action. In our opinion, without a surprise entrenched Arctic cold blast in the US and or Europe, large gains in natural gas prices will likely be the result of short covering. As indicated already, we think the natural gas market is putting in a key low with sellers potentially becoming exhausted and/or concerned about holding positions below some production prices.
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.
