Written Commentary
CRUDE OIL
In looking at the quote board this morning, modest strength in the energy complex stands out as an oddity. In other words, the petroleum markets do not appear to be overly sensitive to the prospect of higher interest rates for longer and seem to be capable of discounting evidence of softening energy demand. While not a direct impact on the crude oil market, Russia has apparently ended the ban on low-quality diesel exports. However, the bull camp is likely to be emboldened by an increase in Chinese energy consumption the Golden week holiday with 21 million people expected to fly within a span of eight days. Despite a 16-month high in net spec and fund crude long, the crude oil market continues to act resilient. However, sentiment throughout the trade remains very bullish with $100 oil price predictions flowing daily. Clearly, the predominate theme of the bull camp is the prospect of further tightening of global crude supply which is seemingly continuing despite signs of softer demand. In a longer-term supportive development, US oil drilling activities dropped for the third week in a row and fell rather significantly by eight rigs. Offsetting that long-term and minimally supportive decline in rig activity is a ruling last week by a judge in Louisiana who ordered expansion of this week’s sale of govt oil leases in the Gulf of Mexico. In fact, the court ruling directed the Biden Administration to include additional acreage in the upcoming sale of leases. While the continued signs of domestic and international crude supply tightening are likely to continue, as prices rise further, the status of demand will become increasingly more important. Therefore, deterioration of global economic sentiment from the current breakdown in global equities will likely temper energy demand expectations. In addition to demand threatening anxiety flowing from equities, the markets are also concerned about additional rate hikes slowing the economy and slowing energy demand.
NATURAL GAS
While the November natural gas futures managed a double low at the end of last week and has bounced this morning, fundamentals remain squarely in favor of the bear camp. Given the net spec and fund short sitting in the middle of the last five months trading range, the natural gas market is not yet technically sold out or excessively short. Natural Gas’ positioning in the Commitments of Traders for the week ending September 19th showed Managed Money traders were net short 32,811 contracts after increasing their already short position by 5,662 contracts. We see the market vulnerable with milder temperatures in the shoulder season ,particularly in Europe, a settlement of the Australian gas workers strike and last week’s slightly larger than expected EIA injection leaving the bear camp in control. While the bias remains down, pressing the downside at or below contract lows is not wise especially with bearish fundamentals widely embraced and the market likely approaching the largest spec and fund short since April.
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