Written Commentary
NATURAL GAS
The bear camp in natural gas market returned to force yesterday with milder temperatures facilitating bearish sentiment toward natural gas shares, ETFs, and futures prices. However, those pressing the short side of the market should keep in mind the Kremlin has indicated an EU gas price cap is “unacceptable”. Apparently, news of a blast at a Russian gas pipeline overnight has been discounted perhaps because of an increase of 4.4% in LNG floating supply over the prior week. On the other hand, the US temperature outlook should be supportive with a major Arctic storm poised to move across the United States in the coming days. Perhaps the bear camp is confident that FERC will not allow the Freeport LNG export facility to restart loadings before the end of the year. Given that the natural gas market held one of the largest net spec and fund short positions of the pandemic early last week and given the post COT positioning report price slide of $0.88, the natural gas market is becoming extremely oversold. With February natural gas prices falling back toward 6-month consolidation lows around the $5.50 level, speculative players aggressively short, an Arctic blast in the US ahead and the brunt of the northern hemisphere winter sill ahead, we see the market ultimately respecting the $5.50 level.
CRUDE OIL
With several middle east producers reducing prices (Dubai and Iran), ongoing concerning Chinese Covid headlines, continuing weakness in global equity markets and a narrowing of the WTI/Brent crude oil discount, the bear camp has several fundamental arguments in place today. Even the Chinese government has moved to reduce gasoline prices apparently to adjust domestic pricing to recent declines in international prices. Apparently, the markets have a surprising take on the impact of China relaxing its Covid restrictions with a portion of the trade thinking energy demand will recover despite the explosion in infection counts. However, according to official Chinese government statements yesterday there were only 5 deaths registered which suggests the mortality of the flare is not significant. While the markets have been aware of very strong Indian oil demand Bloomberg overnight reiterated that theme with news that Indian crude oil imports in November increased by 3.1% and posted the highest import tally since July. Furthermore, Bloomberg indicated Indian November oil product consumption reached the highest level in eight months. Nonetheless, we think the petroleum markets are vulnerable to demand destruction selling ahead. Unfortunately for the bull camp, recent supply news has favored the bear camp with US EIA crude oil inventories last week jumping by more than 10 million barrels in a single week! Furthermore, with a 3.3% week over week decline in the US refinery operating rate, the consumption of prompt crude has likely moderated thereby increasing the potential for another large storage jump in crude oil stocks this week. In another major bearish supply development released yesterday, Saudi Arabia announced their October crude oil exports reached the highest level in 30 months. Going forward, crude oil prices are likely to draft modest support from last week’s Chinese government economic forum which indicated the central government will provide stimulus for the economy and might ease monetary policy.
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