Written Commentary
CRUDE OIL
The chop in the petroleum markets continued overnight and has resulted in fresh damage to the charts. Even though the near-term trend is down in crude oil and a trade below $75.00 is likely, longer-term supportive issues like serious declines in the dollar (which makes US exports more attractive), evidence of ongoing strong Asian imports, and predictions from Goldman that recent Arctic cold in the US will push up demand should help the market respect support $75.00. Adding to the early bearish bias are several negative headline developments overnight. The bear camp should be emboldened from reports of falling diesel prices in the face of a looming EU ban on Russian refined products, and from unchanged OPEC+ restricted production, a surge in Russian diesel supply to Brazil head of the fuel ban, and softer Indian fuel demand from a cold front. Unfortunately for the bull camp, supply news this week (from the EIA today and from the API Tuesday) was patently bearish with EIA inventories rising across-the-board and the API posting a large 6.3-million-barrel increase in crude oil inventories. Adding to the bearish supply-side trend, EIA crude oil inventories this week expanded their year-over-year surplus to a very material 37 million barrels. However, the energy markets continue to receive positive demand news flow from Asia, with January Asian crude oil flows reaching all-time high levels of 123.2 million metric tons (nearly 7 million barrels per day).
NATURAL GAS
The fact of the matter is that the bear camp has little concern for a major shift in bearish supply and demand conditions. In fact, without a very significant Arctic cold blast settling into the US or Europe for an extended period, it will be difficult to create extreme tightness concerns. Granted, the market has seen lost US gas production because of extreme cold with daily production in some areas running 5% below normal levels. Certainly, the net spec and fund short in natural gas is exploding with the massive declines over the past 2 months. Looking ahead, even if today’s weekly EIA working gas in storage withdrawal surprises with a massive withdraw above 225 BCF, we doubt the surplus to 5-year average inventories will be eliminated. Every time we think the natural gas market has forged a capitulation washout, the market dives further and would be buyers are discouraged. However, reports of “smart downside money” and hedgers stepping in and buying futures will not change the bearish pattern without 180-degree reversals in several key fundamental factors. It does appear that natural gas is in a financial/margin/mechanical implosion with prices already well below the cost of production from many areas.
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