Written Commentary
CRUDE OIL
Despite a series of fresh bearish supply and demand headlines overnight, the crude oil market has extended the sharp recovery off yesterday’s spike low. Fresh negatives include a story confirming the Americas continue to expand production growth faster than OPEC, aggressive hedging by Asian refineries and an avalanche of soft European economic data overnight. While classic supply and demand fundamentals in the petroleum markets remain patently negative, the sharp range down and aggressive rejection of the washout yesterday might indicate a temporary bottom from a technical perspective. Unfortunately for the bull camp, ongoing US bank sector problems, an increase in weekly initial unemployment claims and ongoing negative sentiment from equities look to keep energy demand concerns in place and that in turn should limit the magnitude and duration of short covering gains. Furthermore, signs of disappointing Chinese manufacturing and services PMI data, the threat of softer energy demand from China could be partially confirmed by the Saudi Arabian reduction in its June Arab light oil prices to Asia and the US. Another potential confirmation of disappointing Chinese energy demand recovery is evidence that Asian crude oil imports declined last month with China and India pulling back on purchases. In conclusion, crude oil has probably made a temporary low from oversold technical signals but without a substantial improvement in global psychology following today’s US jobs report the gains are likely to be limited and brief.
NATURAL GAS
Unlike the petroleum markets, the natural gas futures are not significantly overdone in classic short-term technical measurements. Certainly, the net spec and fund short in natural gas is expanding, but we suspect the market has yet to return to the largest net short of 2023 of 142,000 contracts. While the weekly EIA working gas in storage report showed a moderate narrowing of the current surplus to 5-year average storage levels, the bull camp should remain back on their heels from signs of ongoing very strong lower-48 states production. Furthermore, daily US flow to US LNG export terminals is averaging only 13.4 BCFD which is below the record level seen last month of 14 BCFD. Over the last four weeks, natural gas storage has increased 233 bcf. On the other hand, the cooling season has effectively started in portions of the US with cooling degree days rising above heating degree days for the first time this year. Unfortunately for the bull camp, short-term technical indicators like RSI are not as oversold as in the petroleum markets suggesting more downside action is likely.
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