Written Commentary
NATURAL GAS
With a lower low yesterday, milder Chinese, and US temperatures and an in-range weekly withdrawal from EIA gas stocks, the bear camp enters the last trading session of the week with the edge. On the other hand, European gas prices are likely to post a 3rd straight week of gains with low temperatures throughout northern Europe expected through the end of next week. However, despite the unremarkable weekly withdrawal of EIA gas in working storage, US storage as a percent of the 5-year average jumped to a 2.4% deficit. In other words, the winter season has begun, and US supplies are showing signs of tightening even without the restart of a key US LNG export facility. The weekly natural gas storage report showed a draw of 81 bcf. Total storage stands at 3,483 bcf, or 2.4% below the 5-year average. Over the last four weeks, natural gas storage has declined 18 bcf. However, news that the restart of the Freeport export facility has been pushed to the end of the year should add to near term downside pressure. With Putin not responding to the European agreement to implement an oil price cap, and Moscow indicating they will increase gas supply flow to Uzbekistan the bear case remains broad. Initial downside targeting in January natural gas today is $6.57.
CRUDE OIL
Almost immediately the G7 price cap has been watered down by indications from the Indian oil minister that they remain open to buying Russian crude oil on a term basis and because of G7 comments indicating there will be some discretion and flexibility in determining the market price for Russian oil. In short, beyond agitating Putin, the price cap is a flop as government officials simply have no understanding of how the markets work in the real world. Evidence of the futility of the price cap surfaced overnight with evidence that China has begun to buy up Russian crude cargoes again. Furthermore, small independent Chinese refineries (teapots) have resumed bidding for Russian cargoes. However, if the price cap fails to support prices that could tilt the December 4th oil producers meeting to consider cutting production again. In fact, Bloomberg yesterday reported OPEC crude oil output last month declined by over 1 million barrels per day. In fact, the last report showed sharp declines in OPEC monthly production which offers the cartel the ability to reduce output quotas without altering current output levels. A cushioning for oil prices is news that the Biden administration will halt SPR sales, but has they indicated they will not begin to refill the reserve until prices fall toward $70.00 which in turn could make $70.00 a magnet for the market. Going forward, aggressive US refinery activity is likely to create divergence between crude oil and product prices in the coming weeks. Along those lines, US crude stocks saw significant declines this week and that is probably the result of strong near-term refiner demand for physical crude. Without a return to definitive risk-on sentiment today, we think crude is vulnerable to week ending profit taking.
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