Written Commentary
CRUDE OIL
With a Chinese credit downgrade overnight, comments from Putin that OPEC+ production cuts will “take time to implement” and psychological demand fear from the COP28 conference, the path of least resistance remains down in crude oil. However, the Saudis have indicated that the production cuts are likely to remain in place beyond the first quarter and that could discourage some sellers. Fortunately for the bull camp, favorable Chinese services and composite PMI readings for November overnight serve to offset building global energy demand fear as the petroleum markets have not shaped soft US data into a positive recently from the increase in rate cuts hopes. Minimally supportive developments include building shipping trouble at the Panama Canal and the prospect Chinese refiners will shift buying from Venezuela to other sources as discounts from that source dissipate. With crude oil prices falling in the face of several incendiary events in the Middle East recently, we think the bull camp will remain off balance. Over the weekend and yesterday fighting in Gaza heated up with reports of 50 casualties in northern Gaza from Ariel bombardment by the Israeli Air Force, the start of an Israeli ground attack in southern Gaza and the attack of two Israeli vessels in the Red Sea. However, the energy markets should find support from news that the US Department of Energy is attempting to refill its Strategic Petroleum Reserve with due haste. Fresh limiting forces for the energy markets are renewed strength in the US dollar and fresh US energy demand fears from the US following a much weaker than expected US factory orders report yesterday. In fact, if the US/Chinese naval conflict worsens that would certainly result in major demand threats from both the US and China.
NATURAL GAS
The bear camp retains control with supply very burdensome and the net spec and fund short not yet at levels indicating the market is “mostly sold out”. However, the market is extremely short-term oversold with a seven-day high to low washout of $0.451 Furthermore, temperatures are expected to remain mild, spillover pressure from crude oil is likely to continue and US gas output will likely remain at record levels. The COP28 conference dialogue is mostly negative to gas from a long-term perspective following talk of incrementally phasing out fossil fuel. However, there have been presentations suggesting natural gas should be utilized as a temporary petroleum substitute until alternative sources reach critical mass. In the short term, European traders have shifted their focus forward to summer gas storage levels which is very bearish as that indicates winter supply is so flush traders think a large surplus will remain in place well into 2024.
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