Written Commentary
CRUDE OIL
The bull camp has extended its control this morning with an upside breakout and the highest trade since December 1st. The upside track is justified by improved energy demand views and supportive US supply information from the EIA yesterday. Not surprisingly, the outlook for the Chinese economy and therefore Chinese energy demand is improved with the government offering another stimulus package and Chinese equities posting gains between 2% and 3% today. Adding into the bullish track is yesterday’s larger than expected outflow of EIA crude oil inventories especially with the year over year deficit approaching 28 million barrels. With the upside breakout it goes without saying that technical action remains positive in crude oil with the market extending the pattern of higher lows and higher highs and the March contract reaching the highest level since the end of November. Once again, the weekly EIA report was a mixed bag for the petroleum complex with another large crude oil stock decline lifting crude oil prices. However, the net takeaway from the weekly EIA report was bearish to the products and could eventually be bearish toward crude oil as product inventories continue to surge to excessive levels. The US Operating rate was artificially knocked sharply lower from extreme cold which resulted in a 15% outage of Gulf Coast refinery activity, and that in turn could mean crude supplies next week could rebound sharply. However, generally positive macroeconomic sentiment remains in place, technical signals have shifted positive with the latest higher high and because of a Citi forecast of $90 oil overnight off predictions of a Middle East supply disruption.
NATURAL GAS
The short covering track has extended in natural gas this morning despite several negative headlines regarding the Chinese LNG market. In addition to Russia projecting 2024 gas pipeline exports to expand sharply the trade sees the Russian share of exports to China increasing again. Obviously, several Chinese stimulus efforts have improved Chinese commodity demand prospects this year. So far this week, the trading range in natural gas has been extremely narrow with reports from the gas market in Europe of implied volatilities falling to the low levels seen prior to the start of the Ukraine war. While further short covering might be seen, mild temperatures through the end of the month in the US certainly leaves the bear camp confident especially with prices up and away from the recent low and many traders not expecting a surprise from the weekly EIA working gas in storage report later today.
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