Bearish Factors Mount in Nat Gas
Bearish factors continue to pile up in the natural gas market with another large weekly US storage injection yesterday, news that the fire damaged export facility in the US will need “full government permitting” to restart and mild temperatures all emboldening the bear camp. Seeing the export facility restart delayed due to permit requirements would extend the backing up of supply inside the US and in turn expand the US natural gas discount to European prices significantly. Over the last four weeks, natural gas storage has increased 468 bcf. With predictions of mild temperatures over the coming 2 weeks, the injection season looks to continue and the deficit versus the 5-year average storage level looks to continue to narrow. Even the European storage/supply situation is bearish with German officials indicating gas supply looks “encouraging”. Prices have not managed to garner support from signs of forward movement on the potential for a Russian price cap and that highlights bearish control. The bias is down in natural gas with oversupply in the US, rising floating supply and indications of European storage nearing government target levels painting a very bearish condition. Certainly, the natural gas market is becoming significantly oversold with the net spec and fund short already outsized before the slide of the last 5 trading sessions. However, in the current market bearish fundamentals easily dominate over oversold technical signals.
While the crude oil market has rejected a significant portion of the initial washout this morning, the fundamental condition favors the bear camp. In addition to reports that China has ordered a fresh lockdown in Xi’an, more activity restrictions implemented in Shanghai and schools closed in hotspots, the market is also facing bearish macroeconomic conditions. In addition to a wave of surging sovereign bond yields, the trade has seen recession forecasts spike and a Bloomberg article overnight indicated that $50 oil might be too expensive in a US recession. In retrospect, the bear camp should be emboldened by evidence this week that oil services companies are seeing increased activity which should mean higher production ahead and with surging Chinese fuel exports even the product markets could drag crude oil prices down. While the crude oil market yesterday reportedly rallied off supply tightening fears, evidence of fresh supply restriction was not apparent or significant to us. Furthermore, crude oil fell back sharply from the spike up move yesterday in a fashion suggesting a possible near term technical exhaustion. Surprisingly, the oil market reversed course following the resignation of the UK Prime Minister even though that news resulted in a significant drop in the US dollar. In the end, recession fear hangs in the market especially with the Fed’s Harker confirming the Fed is actively trying to slow the economy to curtail high inflation. Therefore, crude oil prices should begin to track in sync with US treasury prices and energy demand destruction fear should begin to build.
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