Written Commentary
CRUDE OIL
The bias in crude oil prices has shifted down from outside market developments with the dollar breaking out to the upside this morning, less hope of demand support from lower US interest rates, and ongoing declines in Chinese equity markets. Internal negative developments for crude oil are record US November oil production figures from the EIA, news that production idled by severe cold has returned, evidence of falling US oil exports and soft Chinese demand news derived from collapsing crack margins. On the positive side of the ledger, the trade has been presented with signs of positive January demand news from Asia, with regional imports in January pegged at 28.57 million barrels per day versus 27.03 million barrels per day last month. Yet another supportive development is a shift in Indian buying back to Saudi Arabia after relying heavily on Russian supply. In a minimally supportive supply side development, Iran has threatened to “hit back hard” if the US hits targets inside their sovereign territory. In a negative crude oil development but a positive product market development, the US refinery operating rate fell to the lowest level since late 2022.
NATURAL GAS
In retrospect, we are surprised that March natural gas futures yesterday managed to reject the latest new contract low as US lower 48 natural gas production increased by 1.4% in the most recent tally. Clearly, a return to normal/slightly colder temperatures has likely prompted some shorts to bank profits, but without a severe and sustained Arctic blast, rallies off normal winter weather are likely to be shallow and short in duration. Fresh bearish overnight developments are reduced European gas demand forecasts, evidence that European inventories continue to be stable into the mid-point of the winter season and news that Russia provided full contracted gas volumes to Austria last year. In a longer-term bearish gas development, India announced plans to expand coal-fired electricity capacity this year by the largest amount in six years. However, there is a slight countervailing of the bearish long-term impact from the Biden pause in LNG export facility permitting with the US House of Representatives expected to hold a vote to reverse that presidential edict designed to get environmental votes and further the attempt to kill the US energy industry. While not a near-term impact on prices, it should be noted that open interest in natural gas has reached the highest levels since the beginning of the pandemic which could set the stage for a volatility event and perhaps a major bottom once the mild winter theme has been fully exhausted.
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