Written Commentary
CRUDE OIL
The impact of a looming Israeli retaliation against Iran is sending mixed signals to the crude oil market with some experts suggesting the retaliation will be limited in scope while others think that serious escalation is inevitable with each party only satisfied with their action being the last in the cycle of retaliation. The markets are also seeing mixed fundamental news from China with very strong January through March refinery runs and March throughout reaching 2.4% above year ago levels. However, that news is offset by reports that Chinese March crude oil production reached the highest levels since June 2015. Yet another bullish issue is the prospect of further damage to Russian oil infrastructure with Ukrainian drone attacks seriously disrupting the Russian oil industry. However, with Russia unable to process quantities of crude oil there is the chance that crude oil will be pushed onto the global market at a brisk pace. In a minimal and longer-term bearish development, the Biden administration has indicated they will likely utilize strategic reserves to battle high summer pump prices. While many traders expected Israel to bide time to utilize the element of surprise, we doubt Israel will be dissuaded by the international community from striking back. However, bullish sentiment in the markets remains very high with fresh projections of $100 per barrel oil populating the press headlines and call options remaining very expensive. Looking ahead with the potential of Israeli attacks on Iran and perhaps on Iranian oil facilities, the trade should remain on edge as Iran is currently exporting roughly 1.5 million barrels per day which according to some sources amounts to 1.5% of total global supply. However, the trade is aware that Iran is attempting to raise exports and has dramatically increased supply in offshore floating storage. We see crude oil prices exhibiting corrective action in the coming 24 hours as EIA crude oil inventories look to build again, and because Chinese energy demand concerns resurfaced overnight following a sweep of soft Chinese economic data.
NATURAL GAS
We suspect June natural gas is poised to make new contract lows as we see shoulder season temperatures resulting in US and European inventories rebuilding aggressively and that in turn could bring about a final capitulation of natural gas prices. Adding into the bearish bias is a week over week 11% increase in LNG on global floating storage. Unfortunately for the bull camp, the net spec and fund short position in natural gas remains well below levels we suggest would present a “mostly liquidated” market. Adding into the negative bias is news yesterday that a portion of the Freeport LNG export facility is still “off-line” for the fifth day in a row. Furthermore, the press is reporting the Freeport export facility is processing only 5% of its capacity which should backup supply in the US.
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