Written Commentary
NATURAL GAS
Despite a modest rejection of last week’s new contract low into the close Friday, and a higher high this morning, the path of least resistance remains down in natural gas. While we are unclear of the ultimate impact of open interest nearing 1.5 million contracts, a long-held net spec and fund short in natural gas has remained low despite declining prices and that could suggest some long accumulation. However, the bearish drumbeat continues with US temperatures trending in a fashion that winter heating degree days in the US are likely to be way below normal. Furthermore, while there was one very large withdrawal from US storage, European storage levels remain solid, and the European trade is shifting its focus to summer supplies in a sign bearish sentiment continues to dominate. Unfortunately for the bull camp the net spec and fund short in natural gas is not significant and is unlikely to produce significant short covering.
CRUDE OIL
With strength in the dollar, ongoing significant declines in the Shanghai Stock Exchange index, news of a decline in Spanish 2023 crude oil imports and perhaps most importantly ,a lack of positive price action from intense US and UK attacks in the Middle East, the bias in energy prices remains down. Furthermore, crude oil in floating storage increased 8.3% last week and buyers are beginning to avoid the Red Sea with attempts to buy from closer selling destinations. With the sharp plunge in crude to end last week’s trade reaching the lowest level since January 17th, the market could be headed down to $70.00 unless there is a clear sign that Iran or some other Middle East country has stepped in in favor of Iran. Fortunately for the bull camp, the net spec and fund long in crude oil is possibly the lowest since 2010 which could reduce selling interest on further declines. In retrospect, last week saw the definitive bull case in crude oil eroded by an increase in weekly EIA crude oil stocks and by a plummeting US refinery operating rate which should reduce physical crude demand in the US. The US refinery operating rate is now at the lowest level since December 2022 and could facilitate a rebuilding of what is a 30-million-barrel year-over-year deficit in EIA crude oil supplies. On the other hand, the very low US refinery operating rate should begin to deflate what has become a very burdensome supply issue for products in the US. In conclusion, with Chinese demand fears front and center and potentially a major bearish force, the dollar should be monitored closely especially given last week’s upside breakout and the highest trade since early November.
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