Bear Camp Has Edge in Crude
From the overnight news flow the bear camp has the edge in crude oil off signs of softer demand. While Chinese GDP readings on their face appeared positive, the trade interpreted the data as soft, and that demand negative was accentuated by mostly soft global PMI readings released overnight. However, the bear camp also saw news that crude oil in global floating storage over the last week increased by 2.4% but that bearish news was tempered by the fact that Asian-Pacific floating storage levels declined. Surprisingly, the energy complex did not benefit from the interest rate/commodity relief rally environment late last week. However, Russian comments and predictions from analyst that Russia would easily get around a price cap severely limits the bull camp and basically increases the impact of sagging economic information on energy demand expectations. Even though the US saw only two additional rigs operating in the weekly Baker Hughes report, the total rigs operating is at the highest level since the pandemic was recognized as an economic disaster. Recently, the US President indicated the Department of Energy would refill the SPR with prices around the low $70 per barrel level, which could deter initial selling at that level in the future. While Russia could retaliate against the “price cap” with some form of energy supply disruption, without a disruption, demand news will likely dominate prices this week.
As opposed to late August when the trade was bidding up natural gas prices for fear of a significant winter shortage in Europe, the market has seen evidence that European storage levels have reached targets that should take the edge off colder than normal temperatures. In our opinion, US injections will continue for several more weeks leaving the natural gas market capable of returning to prewar levels down at $5.00. On the other hand, the most recent COT positioning report showed natural gas holding the most bearish spec and fund positioning since the early days of the pandemic and proceeding to the $5.00 level could put the net spec and fund short at the largest level since 2015. As of late last week, the Russian national gas company indicated its gas flows to Europe via the Ukraine pipeline remained steady. As indicated already, supply and demand forces remain bearish in natural gas with US supplies to continue to build up and Europe unloading as much supply from tankers as facilities allow. However, it should be noted that a hot weather forecast for Europe into the end of the month could lend support for prices today.
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