Written Commentary
CRUDE OIL
While it appears that crude oil is destined to remain within a broad five dollars per barrel trading range, prices are in the upper quarter of the range and fears of slumping global demand are ringing louder than fears of Middle East supply disruptions. Furthermore, Libya has restarted production from its largest oilfield, hedge funds reduced long positions last week and despite recent strong Chinese oil import data signs of economic problems in China should be tempering Chinese oil demand prospects. The bear camp should be emboldened by a 3.2% increase in crude oil in global floating storage especially with floating storage in Asia jumping significantly. However, the US continues to buy crude oil for the SPR, EIA crude oil stocks declined last week and posted a material 18-million-barrel deficit to year ago stock levels. Furthermore, supply risks remain elevated with the US, Yemeni rebels, Pakistan, and Iran all launching attacks after US production was temporarily curtailed by 600,000/700,000 barrels per day due to extreme cold last week. While Chinese oil imports have remained strong, Russian shipments to China increased by 24% for total of 107 million metric tonnes. Unfortunately for the bull camp, positive US energy demand prospects are becoming increasingly offset by escalating economic and financial concerns for China. Apparently, last week Chinese government officials ordered heavy debt ladened local governments to “halt” some infrastructure projects which creates concerns of a Chinese financial contagion. Certainly, a disruption of supply flows from the Middle East could suddenly ignite a range up extension in prices, but US product supplies are very burdensome and are likely to become even more burdensome in the weeks ahead.
NATURAL GAS
In retrospect, the natural gas market seemed to anticipate the polar vortex that hit the United States in the first half of January as prices ran up well ahead of the cold and with a warm-up through the end of the month it appears that the bull rally of the winter of 2024 has ended and has been reversed. However, both US and European gas trading open interest is up significantly to start 2024, and that has prompted talk of a major bottom in prices but without a major shift in physical supply statistics, prices are likely to remain under pressure. Since the early December low, US natural gas open interest has skyrocketed with European gas trading posting a 40% increase over year ago levels. In the end, value at the early December low of $2.098 is unlikely to hold today especially given the gap lower washout, a recent significant jump in European wind power generation and given less cold in the US forecast.
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