Written Commentary
CRUDE OIL
While the bear camp retains control, the crude oil market is oversold from a double digit percentage decline from the April high, OPEC overnight suggested it could extend production cuts again, there was a 50,000 barrel per day decline in April OPEC production and the question of fighting or cease-fire in Gaza should keep the bear camp on edge. However, surprisingly large inflows to API and EIA crude oil inventories earlier this week, a one-year high in US Gulf Coast crude supply, unsold West African May supply, and the prospect the Saudis will be forced to reduce official selling prices keeps interest in the short side alive. Furthermore, US supplies are likely to continue to build as the US refinery operating rate has declined over the last six weeks in the face of what should be a seasonal climb in processing. While risk appetites briefly benefited from Fed Chair Powell’s post-FOMC meeting comments, energy prices found little if any fresh support. As a result, crude oil and the products have broken out to the downside this week. Israeli indications they would “go ahead” with a planned attack on southern Gaza are completely overshadowed by a second confirmation of large supply inflows to API and EIA crude oil storage readings. While it is well below capacity, Canada’s Trans Mountain pipeline has started to ship crude oil, and that has put additional pressure on energy prices.
NATURAL GAS
While European gas prices have firmed from cool weather and there was a slight dip in April Russian shipments to Europe, the path of least resistance remains down especially given forecasts for a decline in US demand of 3% for this year. Therefore, neutral, or bearish EIA storage data this morning could send the market into new contract lows, while a bullish (small injection) is likely to be ignored. After two days of volatile action, natural gas prices have followed through on Tuesday’s reversal and are on the verge of a downside breakout to new 2024 lows. Today’s EIA storage report is expected to show a weekly build of 50 to 60 bcf, which would keep storage well above last year’s comparable total and the 5-year average and has pressured natural gas prices coming into today’s action. The Freeport LNG export facility remains far below capacity due to operational issues, and that has limited support from US export demand. Chesapeake Energy said that they would further reduce their production during the second quarter due to lower demand, and that put additional pressure on natural gas prices. There is well above normal temperatures over the southeastern US in the latest 6 to 10 day forecast that may increase air conditioning demand, but that may not be enough for natural gas prices to put the brakes on their current selloff.
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