Written Commentary
CRUDE OIL
While major oil ETF instruments on both sides of the Atlantic have seen inflows, we see that money attempting to pick a bottom without sufficient evidence. Apparently, the trade is unconcerned about Putin’s threat to cut oil flows in response to the price cap with crude oil prices remaining just above last week’s spike low. Evidence of the markets ongoing bearish bias is press coverage this morning suggesting the opening of China is likely to result in a reduction in demand because of an explosion of infections. While some economists suggest a price reaction to the implementation of the price cap could still surface, last week’s sharp declines in the face of the implementation suggest the latest sanction is a nonevent. With a poor finish on the charts at the end of last week capping off a 5-day slide of $12.72, the market looks to start the new week vulnerable. Even though a backlog of tankers carrying oil through the Bosporus Straits is delaying some supplies and with the Keystone pipeline spill expected to reduce Gulf crude inventories, those threats are seen as temporary and perhaps as insignificant. Certainly, there are many countries complying with the latest embargo (price cap), but given evidence that India took 55% of Russian seaborne exports in a recent monthly trade report means Russia maintains at least one very major outlet. However, over the weekend Putin indicated Russia could cut oil production and refuse to sell oil to any country that imposes the West’s “stupid” price cap. From the demand side of the equation, hope of an improvement in Chinese energy demand became more suspect over the weekend after news that the relaxing of rules has resulted in a very rapid spread of Covid.
NATURAL GAS
While threats from Putin to halt energy shipments to countries participating in the price cap added to last week’s surprise rally, cold and snow in the UK is expected to extend early this week. In fact, with cold weather also surfacing in Asia a surge of near-term demand is certainly a significant development for a market that has recently plummeted. A sharp gap up trade off moderate cold is a reminder to the trade that the northern hemisphere winter has only just begun. With the most recent COT positioning report showing natural gas holding a very lofty net short, the presence of extreme cold and the gap filling recovery last week has and will foster stop loss buying. With the Russians continue to push gas through Ukraine at a steady pace and seeing them strike a deal with Turkey to establish a distribution hub, the bull camp does face some supply adversity. With a gap filling spike up move last Friday and a gap up trade early today, January natural gas appears poised to trade consistently above $7.00. In our opinion, for gas to forge consistent gains on top of current gains will require an extension of cold weather in the UK, Asia and or Europe perhaps prompting chatter of a cold winter.
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