Written Commentary
CRUDE OIL
Even though crude oil is likely to remain within a $6 trading range, prices look to continue to recover from lows which likely overstated weakness in global energy demand. Granted, economic data from China and Europe continues to disappoint and so far, the markets are simply not confident Chinese stimulus efforts will produce results quickly. On the other hand, global economic sentiment continues to improve on the back of signs of ongoing strength in the US economy despite a possible extension of the US rate hike cycle. Last week, US gasoline imports from Europe hit a 12-month high, Chinese traffic activity has returned to pre-Covid levels and US implied gasoline demand readings have been impressive over the last two months. According to Bloomberg US oil demand in April as measured by the EIA reached a 16 year “seasonal high” if consumption of natural gas liquids and feedstock for plastics are included in measurements. Furthermore, positioning reports indicate the crude oil market was overdone into the June lows with hedge funds posting the smallest net long in 11 years. Furthermore, another measure of speculative interest in the form of the COT noncommercial and nonreportable net long positioning, fell to the lowest level since December 2012! Therefore, it is not surprising to see crude oil prices continue to claw higher from both technical short covering and fresh buying from an anticipated recovery in demand. While not a near term supportive development, US drilling companies reduced oil and gas activity counts for a ninth straight week and according to Baker Hughes saw the largest quarterly drop in drilling since 2020. However, it should be noted that oil drilling rigs operating fell by only one rig with most of the declines seen in gas drilling activity. Even though we see crude prices locked in a trading range bound by $73.29 and $68.71, the bull camp appears to have control to start today, with crude likely to take direction from US equities and US data. However, while it is difficult to interpret the propaganda flowing from the war front, Putin risks a serious challenge to his leadership if recent events result in an uprising against the war. Even though there could be disruptions of physical supply flow in the event of a breakdown of the Russian regime, ultimately, we think a regime change will present the potential for unfettered supply flow from Russia which could send prices to new lows for the year.
NATURAL GAS
In retrospect, we are surprised with the strong close at the end of last week as the US weather forecast saw extreme temperature areas shift and/or narrow slightly. In fact, intense heat in Texas occurs in a narrower band along the southern US border and is generally West of New Orleans. Furthermore, maximum US temperatures look to be mild into July 8th with only slightly above average temperatures reaching into the Ohio River Valley. On the other hand, forecasts for hot temperatures in Europe throughout this week are expected in the lower half of Europe divided by a diagonal line running from Spain, France, Germany and into Poland and it appears that that it is hot enough and widespread enough to offset neutral US temperature projections. In a slightly positive longer-term development, Baker Hughes weekly rig operating count showed gas rigs operating fell by 6 to 124 rigs operating a which is the lowest since February 2022. In a bearish global supply development, Russian shipments of gas through Ukraine remain normal despite Russian statements last week indicating a new deal to ship gas through Ukraine will not be renewed when the current contract expires. Unfortunately for the bull camp, the net spec and fund short positioning in natural gas has been consistently narrowed since the end of February and is now near the smallest net short since the end of May and 2021! This week will be a test of the natural gas market’s focus as temperatures in the US did not look to be hot enough to rekindle the early June rally unless traders embrace the heat in Europe as a more important influence.
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.
