Written Commentary
CRUDE OIL
The markets have received some evidence of improving Chinese demand, but that is unlikely to shift focus away from the current trend of global demand destruction. Unless there is significant improvement in risk sentiment, crude oil and the products are likely to remain on the defensive. A report that three state-owned refineries in China will increase their crude oil processing by 10% in October lent support to the market overnight. Russia’s military mobilization gave a boost to crude oil and product prices early yesterday, as that increases the chances for supply shortages in Europe this winter. Yesterday’s EIA report showed crude oil stocks rose 1.141 million barrels last week, which was a smaller increase than expected. Yet, stocks are the highest they have been in six weeks and the second highest since December. US crude production was unchanged for the third week in a row. It has held between 11.9 and 12.2 million bpd since mid-May.
NATURAL GAS
Natural gas saw wide-sweeping action on Wednesday within its recent consolidation zone, and it stayed in a tight range overnight. The market likely needs get past the EIA storage report today to break out. Russian saber-rattling has lent support to the market, but gains have been limited by US LNG export capacity, which remains hamstrung by the reeport export terminal shutdown. US gas production is close to record highs, which is weighing on prices. The Reuters survey for today’s EAI report is calling for a net injection of 93 bcf into US natural gas storage last week. This would still leave total storage more than 10% below the 5-year average for this time of the year. However, lower power plant demand due to mild weather, limited LNG exports, and strong domestic production set the stage for large injections over the next few weeks. Unless there is a bullish surprise from today’s report, natural gas prices could be vulnerable to further downside action.
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