Written Commentary
CRUDE OIL
We see the failure to rally off another large decline in API crude oil stocks as a sign of a lack of bullish confidence/interest. In fact, if the EIA produces a similar outsized decline today, stocks will have declined sharply in five of the last six weeks and that will also likely result in the US crude oil year-over-year surplus falling 66% since the beginning of December. Perhaps the crude oil trade is limited by comments from Russian oil company official’s indicating Russian deliveries last year were at the same level as the previous year which clearly signals little impact from the sanction efforts. While not significantly bullish developments, the petroleum markets were boosted yesterday by news that Indian refineries are giving off signs of becoming bargain hunting buyers perhaps because of the very large Saudi price cut but also from news that 300,000 barrels per day of production is still out of commission in Libya. After the close, the weekly API survey said that US crude oil stocks had a weekly decline of 5.215 million barrels which is a much larger decline than trade forecasts. However, the crude oil market continues to face a steady flow of bearish fundamental developments with China posting record oil production last year, US November crude oil exports posting a four-month low and an EIA prediction yesterday forecasting US crude oil production this year will post another record albeit a very minimal new record.
NATURAL GAS
The trade has clearly experienced consistent buying from the approach of very cold weather in the United States and UK. In fact, very cold temperatures are expected through this weekend in the US and UK which will likely temporarily override entrenched views of a very mild heating season in the northern hemisphere. However, as indicated in petroleum market coverage today, US heating degree days are currently running 32 “degree-days” below normal which would explain last week’s much smaller than anticipated withdrawal. On the other hand, the trade is facing the coldest temperatures of the early 2024 winter season with the last positioning report showing the natural gas market continues to hold a relatively large net spec and fund short of 77,936 contracts, which probably means some of the recent gains have been stop loss buying. In retrospect, the magnitude of the gains in natural gas prices in the month of January suggests something other than short covering is operating in the market. Nonetheless, we see fundamental resistance from record December exports from Norway and from an annual EIA forecast of record US production and record US demand which will think will see the rate of US production gains outpace the rate of US demand gains.
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