Written Commentary
NATURAL GAS
The path of least resistance in natural gas has shifted down with both supply and demand news yesterday patently bearish. Apparently, US temperature forecasts now call for normal temperatures through June 6th and with US dry lower 48 gas production expected to rise from last week the bears have control. In retrospect, the natural gas market was overbought from last week’s rally and with the market initially respecting support at $2.50 several times recently the trade is likely facing a key junction. A shorter-term supportive development came from a Bloomberg estimate that LNG on floating tankers declined by 6.9% versus last week. In a longer-term supportive development, Chevron is forecasting improved US LNG demand as gas gains market share over coal and crude oil. From a technical perspective, the recent rally in natural gas has likely moderated a long-held net spec and fund short position which could result in a wave of extremely aggressive fresh selling if there is a macro economic meltdown later this week. Weather for most of Europe shows hot temperatures isolated along the Mediterranean through Thursday but should not be supportive of prices. In the end, natural gas charts have broken down and that combined with the potential for macroeconomic selling from tense US debt ceiling negotiations should give the bear camp a near term edge.
CRUDE OIL
We see an extension of energy demand concerns from big picture macroeconomic developments directly ahead. Furthermore, hedge funds continue to add to bearish bets, the dollar continues to show strength and the latest news on the Chinese economy is disappointing. However, the Saudi oil minister today has indicated short sellers are likely to experience significant losses from the upcoming OPEC+ meeting. Minor supportive issues are widespread evidence of expanding global jet fuel demand, extreme heat in Asia and signs that China is showing strong demand for fuel. This week’s Reuters poll projects EIA crude oil stocks to increase by a minimal 500,000 barrels but that slightly negative projection is offset by predictions of another notable weekly increase in US refinery runs of 0.7%. According to Goldman Sachs, the oil markets are nearing a very critical turning point with OPEC+ output showing evidence of declining because of Russian output cuts. From the demand front, the trade remains hopeful a debt ceiling deal will be reached this week and that would create a wave of demand inspired optimism later this week. While big picture macroeconomic developments today will likely undermine energy demand expectations, internal market demand signals remain generally supportive. In fact, China, Europe, and the US have all seen signs of increased refinery activity, and we expect that strong refinery activity will continue to rise to meet increased seasonal demand for gasoline and jet fuel. Another major underpin for energy prices is a record April Chinese apparent oil demand reading.
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