Written Commentary
CRUDE OIL
Prices are lower today despite a decline in April OPEC oil output (Iran and Iraq) and a 7.2% decline in European crude oil storage over last week. However, the API report overnight was very bearish to crude oil with a much larger than expected inflow to EIA crude oil stocks of 4.9 million barrels. Another shorter-term bearish indication is softening Brent crude spreads and increased trade interest in put options. In addition to end of month long liquidation profit taking yesterday, energy prices are likely to remain under pressure from reports that some West African supply for May delivery remains unsold and from reports that US storage tanks of distillate on the East coast are nearly full leaving traders scrambling for a home for purchased supply. Furthermore, hedge funds continue to move to the sidelines perhaps because of the efforts to work out a cease-fire. On the other hand, the bull camp remains hopeful that US crude oil supplies will continue to decline from ongoing strong US exports. However, with the dollar strengthening and breaking to the upside overnight, price support from hope of strong ongoing US exports should moderate. Fortunately for the bull camp, the EIA yesterday said US crude oil exports in February increased to 4.66 million barrels per day from 4.04 million barrels per day in January. Countervailing the strong export pattern is a month over month increase in total US crude oil production of 578,000 barrels per day from January to February which was the largest output gain since February 2021. Furthermore, North Dakota crude oil output jumped by the most since at least 2005, while Texas crude oil output posted the largest monthly gain since March 2022. In conclusion, without a full breakdown in cease-fire talks, or further sharp declines in EIA crude oil inventories, the bear camp should maintain control.
NATURAL GAS
Despite indications that investment funds are beginning to position for an increase in European gas prices this summer, the path of least resistance is down from greater than expected Dutch and British wind power generation and from increased Norwegian LNG exports. In fact, even with projections for US cooling degree days to run 15 degree days above normal, an avalanche of supply remains in the US, and therefore we expect further declines in the weeks ahead. Overnight the market was also hit with higher US gas production readings. On the other hand, expectations suggest European natural gas prices have strengthened recently given expectations of a slowdown of European injections into storage as temperatures rise seasonally.
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