Written Commentary
NATURAL GAS
Suggesting the rally in natural gas prices this week is the result of cooler weather ahead gives too much credit to that storyline as heating demand is not expected to ramp up significantly this early in the season. In fact, the official beginning of the heating degree day measures in the US is near and therefore the trade will soon have numerical data to gauge heating demand as opposed to reports that temperatures are running above or below normal. Looking ahead, we expect today’s weekly EIA natural gas inventory report to show a larger injection than expected and perhaps a triple digit injection. A negative development for gas surfaced yesterday with Russian natural gas output in September reportedly increasing by 1.5%. While we will not rule out a follow-through up to first resistance up to $3.408, the bull camp will need to rely on technical short covering as classic fundamentals remain bearish.
CRUDE OIL
In our opinion, the war premium in crude oil is only $3 to $4 with that premium capable of exploding if the conflict spreads beyond two opponents. A psychological bullish impact came from Putin predictions overnight that the Middle East conflict will spread soon. The US Pentagon have requested Israel delay the start of their ground attack, so the US can prepare its air defense for troops in the region but that pause could pass quickly. Yet another escalating force is severe shortages of food, water, medicines, and fuel in Gaza as aid convoys are moving very slowly. Therefore, the potential for a sudden explosive rally in crude oil remains very high. On balance, the EIA report this week was slightly bearish with crude oil stocks surprising with an inflow, gasoline stocks surprising with an inflow and a reduction in the US refinery operating rate. While news of further Chinese support for their economy helps underpin uncertain Chinese demand prospects a minimum size for new refineries focused on chemical and bitumen products could reduce crude oil imports and in turn increase product imports. It doesn’t pay to position against Middle East supply threats as a major supply threat could surface at any second.
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