Written Commentary
CRUDE OIL
While fear of a broadening of the Middle East conflict sparked speculative buying yesterday, the tide has shifted in favor of the bear camp today with energy demand fears surfacing from exploding US interest rates, questioning of the US reserve currency status from out-of-control spending and the self-perpetuating threat of slowing from exploding energy prices. Even though global supply tightness remains a threat from the Middle East war, the suspension of oil, gas, and gold sanctions against Venezuela deflate the tight supply threat. Consequently, analyst expect Venezuelan output to increase by 200,000 barrels per day. Countervailing the Venezuelan developments is a nine year low in Cushing Oklahoma storage levels this week. According to the EIA weekly report, Cushing, Oklahoma stocks decline to the lowest level since October 2014, but stocks remain above the 20-million-barrel hypothetical shut down level by 1.013 million barrels. However, yesterday’s EIA report was bullish across the board with crude oil and product stocks all declining compared to last week. In a positive development for crude oil, the US refinery operating rate increased by a much larger than expected 0.4% which should provide a slight increase in the call on prompt crude. On the other hand, crude oil should see support from a very strong weekly implied gasoline demand reading of 8.94 million barrels per day and from a strong implied distillate demand reading of 4.41 million barrels per day.
NATURAL GAS
Even though the December natural gas contract appeared to have found some value around the $3.44 level, fundamentals have not shifted in favor of the bull camp. Granted, the Chinese government has instructed gas suppliers to build reserves head of winter and that should provide support for prices, but Chinese liquid propane output in September increased by 10.2% versus last year and temperatures the US remain mild into the beginning of the northern hemisphere heating season of November 1st. Unfortunately for the bull camp, today’s EIA natural gas in storage report is likely to post a larger than expected injection with mild US temperatures and recent reports of record lower 48 state gas production. The path of least resistance is down as reports of record US production, mild US and European temperatures and the potential for a large weekly injection provides very bearish supply and demand arguments.
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