Written Commentary
CRUDE OIL
Like treasuries and the Dow futures the energy complex continues to inject economic optimism from the potential for a global central bank policy pivot toward cutting rates. While we are highly suspicious of a US rate cut in the first quarter (the Fed will require a lot of evidence of softening inflation) it is not surprising that energy demand expectations have improved slightly. However, today’s OPEC+ meeting is likely to set the upcoming direction of petroleum prices with the $6.50 crude oil rally off the October lows requiring further OPEC+ production cuts and not simply an extension of current quotas. In other words, the perceived improvement in global economic sentiment is justification to suggest this month’s lows are a value zone but the bull camp needs help from supply or demand news to shift the trend up. Certainly, a portion of this week’s buying was fresh speculative buying based on the idea that Saudi Arabia will ultimately impose their will on smaller producers and not so much on the idea that Saudi Arabia will contribute more production cuts.
PRODUCT MARKETS
As in other sectors of the petroleum complex, the driving force behind the upside breakout yesterday was a dramatic improvement in macroeconomic sentiment which in turn helped repair recently damaged energy demand views. Unfortunately for the bull camp, the fate of the gasoline trade today sits squarely with crude oil and the outcome of the OPEC+ meeting. With many rumors swirling in the markets regarding the outcome of the meeting, the potential for significant volatility in gasoline prices today is very high. In fact, the gasoline market is probably fundamentally overbought following this week’s wave of global chatter regarding US rate cuts next year, but the bull camp has seen several technical signals shift bullish.
NATURAL GAS
The bearish tide of fundamental news continues to dominate the natural gas market with normal to generally mild temperatures and the potential for a backup of US supply because of extending delays at the Panama Canal both of which should leave the bear camp confident. In fact, despite a withdrawal last week, the EIA gas surplus to five-year average stocks levels increased from 5.4% to 7% leaving the bear camp unconcerned of normal winter temperatures. In fact, as indicated yesterday, European sources suggest there is little threat of severe tightness in Europe this winter with storage completely full and projections for European supplies to end up above 50% of capacity at the end of the heating season.
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