Written Commentary
CRUDE OIL
Clearly, the charts in the crude oil market favor the bear camp with the recent attempt to rally off escalating Israeli military activity quickly reversed and positioning data showing hedge funds exiting crude oil longs. Fortunately for the bull camp crude oil in floating storage fell 11% this week reaching the lowest levels since February 2020, but that supportive development is heavily offset by fears of supply backing up inside the US. It is not a difficult call to suggest the coming sessions will see significant price volatility, as Hamas has indicated the peace talks are back to square one and the international community is having difficulty keeping the semblance of talks alive. However, with Israel and Hamas fortifying positions around Rafah, fighting is likely to intensify. In a development over the weekend, the US has indicated Israel may have violated international law, and we suspect international pressure on Israel to halt the attacks will escalate dramatically with the press reporting 34,000 Palestinians killed in the seven month old attack of Gaza. Unfortunately for the bull camp, the supply situation in the US favors the bears with burdensome US Gulf Coast crude inventories and eastern seaboard diesel stocks nearing storage capacity. Therefore, without a significant explosion of geopolitical angst in the Middle East involving Iran, the bear camp has the supply and demand edge.
NATURAL GAS
With the major run in the first half of May not specifically attached to a primary supply or demand theme, we suspect a major portion of the gains were forged on short covering from long duration short positions. In other words, with the shoulder season in the northern hemisphere coming to an end, cooling demand is likely to pick up and those short the market should be poised to move to the sidelines. In fact, with last week’s injection leaving US inventories at a 33% surplus of five year average storage levels, the market has indeed factored in significant negative information. However, with Ukraine and Russia increasingly targeting energy infrastructure and in particular Ukrainian electric grid facilities, the prospect of an interruption of gas flow to Europe should not be discounted!
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