Written Commentary
CRUDE OIL
We are somewhat surprised with the ongoing strength in crude oil this morning as global macroeconomic sentiment remains negative, US interest rates are higher, the dollar is showing the potential for further gains, and we think the market has overcompensated for the implementation of production cuts known by the market for months. However, API crude oil stocks yesterday afternoon fell by 4.3 million barrels and in turn fostered talk of very strong US holiday demand. Therefore, today’s EIA implied gasoline demand reading might take on added importance for the crude oil market. In retrospect, global energy demand fears sparked the end of June slide in prices and therefore the net take away from US jobs data in the coming 36 hours is likely to set the markets July energy demand expectations. In fact, the rejection of the low last week at $67.05 was likely the result of an improvement in macroeconomic sentiment following a key reversal up in the US equity markets and therefore the direction of equities in the coming 2 sessions could be a litmus test for energy demand and a key price signal. Therefore, for crude oil prices to extend the current pulse up move today will not only require favorable EIA inventory data but might also require positive US jobs related data. While this week’s inventory data will impact prices, we think the crude oil market is currently set to be very sensitive to macroeconomic forces and the bull camp will need positive US data to make up for disappointing Chinese energy consumption.
NATURAL GAS
Clearly, the bull camp is lacking as gas prices posted a fresh low for the week this morning despite comments from the Russian national gas company indicating the potential for a shutdown of gas flow to Europe through Ukraine. However, the trade has seen the threat of a halt in Russian gas shipments frequently since the beginning of the war and the Kremlin did not confirm or deny the potential shutdown overnight. Furthermore, reports from Bloomberg overnight indicate that European strategic storage levels are nearly 80% full thereby producing a quasi-ceiling for European strategic gas purchases! In retrospect, the bull camp should be very discouraged by price weakness in the face of headlines and stories yesterday suggesting El Nino and global warming could combine for a historic heat event. In another negative, price development maintenance at US export facilities have reduced flows potentially backing up US supplies. In fact, without a return to a massive heat dome with significant portions of the US under heat warning status natural gas could be vulnerable to a return to the June lows.
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