Written Commentary
NATURAL GAS
With an upside breakout last Friday to the highest level since May 19th, the market is beginning to factor in increased consumption from extremely hot conditions in Europe, portions of the US and large areas of Asia. In fact, severe drought circles the Mediterranean Sea which should eventually show up in stronger global consumption. While the weekly Baker Hughes rig operating count showed gas rigs operating was unchanged versus the prior week, last week major gas producing companies Chesapeake Energy Corp., Southwestern Energy Company and Comstock Resources announced plans to reduce production because of low prices with initial reductions planned in shale areas in Arkansas, Louisiana, and Texas. Unfortunately for the bull camp US gas production this year is expected to post another record. Adding to the bullish longer-term supply outlook are plans to expand US LNG export facilities with exports reaching 12.1 billion cubic feet per day this year. In the end, recent hotter than normal temperatures throughout the globe and specifically in the US and European areas has shifted sentiment in natural gas in favor of the bull camp.
CRUDE OIL
While the magnitude of risk off from ongoing fears of global slowing has not expanded significantly, fear of slumping global energy demand remains a fixture. Evidence of the bear control in the market is the lack of a definitive upside reaction to what some have labeled was a coup attempt in Russia from Russian hired mercenaries. However, traders see little near-term threat of disrupted Russian oil flows, but the risk of pressing the short side of the crude oil market is certainly increased by the weekend events. In a clear negative supply-side development, weekly floating crude oil inventories increased by 15% over the last week. It should be noted that Asian-Pacific floating crude supply was up 34% and at the highest levels in 13 months! Therefore, concern for Asian crude oil demand is justified but is somewhat offset by calls quick and aggressive stimulus from an official Chinese economic advisor. In a very interesting development, it seems that the two largest Chinese refining companies have conflicting views on prices and intentions for their operations directly ahead. Apparently, petrol China’s Hong Kong unit has been consistently bidding for oil while Sinopec’s Unipec unit has been selling cargoes. In addition to concerns of a very slow recovery in Chinese energy demand, the markets on Friday were presented with additional energy demand threats from very disappointing European PMI data. Contrary to market perceptions, Chinese and Indian energy demand remain robust with both countries posting various import records and/or strong month over month gains in consumption readings. While not a major market bottoming event, we think the US should utilize recent price declines to bring US strategic petroleum reserve levels up from 40-year lows. In a longer-term supportive supply side development, US oil and gas rigs operating declined for an 8th straight week adding to ideas that shale oil production in the US appears to be peaking. Going forward, crude oil prices are likely to show correlation with equity prices and could see weakness exacerbated by further sharp gains in the dollar.
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