Written Commentary
CRUDE OIL
The crude oil market remains on fire with another spike up move overnight. The fear of tight US supply continues to be the primary argument for the bull camp with fear of fresh OPEC+ production cut plans a very close 2nd. In addition to very significant declines in EIA crude oil inventories this week, WTI 6-month futures spreads have posted the most bullish discounts this year. Clearly, the trade has fully embraced the contraction in US crude oil inventories, especially with inventories falling nearly 23 million barrels in just 3 weeks. Furthermore, the bull camp was presented with big news overnight from a Russian announcement that they agree to further oil export cuts. With recent signs of declining Russian output and lower exports and given proof that Saudi Arabia will take aggressive action to support prices, it is possible the Russians are launching a fresh campaign to send crude oil prices back to $90.00. On the other hand, OPEC+ could simply recognize the need to be proactive against a buildup in supply in the face of slackening northern hemisphere seasonal and cyclical demand. It also goes without saying that energy prices this morning are being lifted by the latest Chinese stimulus offerings with large banks cutting rates and Chinese regulators reducing capital reserve requirement at Chinese foreign-exchange banks. Adding into the bullish Chinese macroeconomic developments, Chinese refinery throughput continues to run very strong as refiners take advantage of overseas demand.
NATURAL GAS
Despite natural gas forging a 12 day high yesterday in the face of a bearish supply report, we are unimpressed with the market’s bullish potential. On the other hand, the bearish weekly injection did not result in a sharp setback in the market which at times were trading nearly $0.30 above last week’s low. Over the last four weeks, natural gas storage has increased 114 bcf. However, within the weekly injection report, the surplus to the 5-year average stocks level fell sharply from 9.5% last week to only 8.7% surplus this week. Since July 14th the surplus to the five-year average stock level has narrowed by 5%! Unfortunately for the bull camp, seeing a large surplus narrow is simply justification for an end to a downtrend than it is to the beginning of an uptrend. In fact, our view on temperatures next week favors the bear camp as extreme heat throughout the US is largely missing out to September 8th.
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