Written Commentary
CRUDE OIL
Not surprisingly, the tamping down of global bank contagion fear and subsequent global equity market recoveries leaves the bull camp in control today. The crude oil market has seen its potential for aggressive stop loss selling diminish and has in turn seen potential buying power buildup on the sidelines. Internally, energy demand expectations are by default improved slightly by the moderation of macro concerns but evidence of improving Chinese energy demand has been limited. On the other hand, the supply-side of the equation should provide support following news that Russian, Saudi, and OPEC+ leaders met this week and discussed the sharp slide in prices. However, evidence earlier this week that production from Iraq remains below their quota allowance highlight OPEC+ capacity to reduce production and therefore reducing production is a very easy undertaking. Unfortunately for the bull camp, the International Energy Agency has continued to revise upward its Russian oil production targets which in turn continue to erase Russian predictions of lower output ahead. While total US crude oil inventories at the EIA remain at a 64 million barrels year-over-year surplus US East Coast storage has reached the lowest ever. While there could be several explanations for that dichotomy of storage within the US, the primary reason for divergent inventory levels is extremely heavy export activity from the Gulf of Mexico and steady US oil product exports from Eastern seashore facilities. Overall, we think regional extreme tightness will provide some support to crude prices, but we also suggest traders be aware of the significant importance of key product pipelines flowing to the eastern seaboard.
NATURAL GAS
The capacity of natural gas to maintain respect of a building consolidation low zone at $2.50 is very impressive as is the slow erosion in prices in the face of bearish internal fundamentals. In fact, fundamentals are pervasively bearish and could be very difficult to alter without a major headline surprise. In fact, this week’s US EIA working gas in storage report was a fresh disappointment to the bull camp with a below normal seasonal draw and another significant increase in the level of inventory surplus to 5-year averages. Unfortunately for the bull camp European gas prices continue to fall significantly and that could reduce US export prospects. However, there are signs of strong current US natural gas exports to Asia and the Texas Freeport facility is likely to find itself helping to refill European gas inventories later this spring ahead of the coming summer cooling season. The latest reading on storage in Europe places holdings at 56% of total capacity which is negative for near term natural gas prices, but could be powerfully bullish in late spring. While support is building at the psychological $2.50 level, fundamentals supporting prices are absent and fundamentals capable of lifting prices sharply are somewhat hard to dream up.
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