Written Commentary
NATURAL GAS
On the one hand, a warm forecast for the southern portion of the US, reports that last week’s US temperatures were 12 degrees above normal last week combined with forecasts that temperatures out to July 15th will run 20 degrees days above normal the bull camp is justified in extending recent gains. In fact, given the anticipated spread of extreme heat in the US and Europe the market might continue to claw out measured gains. Even the mountain states showed 109 cooling degree days versus 77 normally with New Mexico, Connecticut, and Texas also running significantly above normal. Countervailing the bullish demand prospects of the coming week of heat, are confident statements from EU leaders indicating strategic supplies are rebuilding and that next year should not be a problem. In another potential negative from Europe, French nuclear output last month was reportedly up nearly 23% thereby crowding out gas for power generation.
CRUDE OIL
While the bias from the charts remains in favor of the bull camp, crude oil is overbought technically and fundamentally. Furthermore, both Brent crude oil and WTI have returned to moving averages with volume and open interest in WTI futures declining after August crude oil moved above $72.50. However, China took another baby step toward supporting its economy with instructions to Chinese banks to lower interest rates to property sector borrowers. In another potential bearish development, Russian water bound export prices have approached price cap levels and that could become an impediment to higher WTI prices. Yet another bearish development are predictions that Saudi Arabia will need to cut production further after August to avoid a buildup in global supply as seasonal demand falls. While one cannot argue against the bull case with the market’s capacity to extend last week’s rally in the Monday trade, we remain skeptical of the importance of the most recent expansion of production cuts by Saudi Arabia and Russia primarily because the cuts were merely fulfillment of the original plan. In fact, chatter in the energy markets yesterday indicate OPEC+ may have to cut output further to have their actions reap rewards in terms of higher pricing. The bull camp was emboldened yesterday because of crude oil spread action showed backwardation returning which in turn is usually a positive demand development. In retrospect, the net spec and fund long positioning in crude oil at the July lows was the lowest level in more than a decade which might be a sign of a bottom or at least a sign of the removal of weak handed longs.
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