Written Commentary
CRUDE OIL
While February crude oil has seemingly stalled at the $72.50 level on the charts, ongoing optimism flowing from global equity markets and expectations for even lower interest rates helps shore up energy demand expectations. However, cash crude grades around the world are showing weakness this morning despite news that week over week global crude oil in floating storage declined by 13% especially with supply down sharply in West Africa which was thought to be responsible for overproduction and conflict in the last OPEC+ meeting. On the other hand, US oil production continues to be at record levels, which is partially offset by US crude oil exports running 500,000 barrels per day more than last year’s record. Unfortunately for the bull camp, global demand signals remain suspect and with Goldman reducing its Brent crude oil forecast by $10 per barrel, as they think supply will weigh on prices. While Chinese demand news has been generally bearish for energy prices, the hard washout since the November high has likely factored softening Chinese import demand. However, Chinese oil production in November increased by 2.6% leaving production in the first 11 months of 2023 up 1.8%. In a minimal supportive development, Chinese refinery throughput in the January through November timeframe increased by 10.1% versus the year prior with November throughput increasing by a mere 0.2% over October likely because refiners are running out of crude because of quota restrictions. While recent weakness in the dollar could help support oil prices, the WTI/Brent crude oil spread continued to widen last week indicating relative bearishness toward US crude oil which is likely the result of very strong US production.
NATURAL GAS
While the press indicates the rally last week was the result of a stronger demand outlook, we think spec and fund short covering provided the brunt of the rally. With a higher high again this morning we suspect more stop loss buying combined with fresh speculative buying off ideas that colder weather is getting closer. Furthermore, Bloomberg over the weekend described LNG exports as robust and that should help underpin prices but should not lift prices consistently. With the current surplus to five-year average storage levels jumping from the prior week, there should be headwinds for the bull camp. The jump on Friday filled the gap left by the sharply lower opening on December 11th which was followed up by some very high-volume trading days.
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