Written Commentary
CRUDE OIL
Crude oil prices this morning are waffling around both sides unchanged with supply concerns from the Middle East offset by concerns of slumping Chinese energy demand if the country sees a financial contagion event from defaults in its real estate sector. In a minimally supportive development, the Saudi national oil company has requested a reduction in the maximum output capacity which could indicate a desire by the Saudis to prevent a buildup of global supply. In a minimal and short-term negative impact Russia has loosened recent energy export restrictions as domestic demand is expected to moderate as extreme cold dissipates. On the other hand, given the escalation of tensions in the Middle East over the prior 72 hours, we suspect the general uptrend will extend with a key uptrend channel support line in crude oil at $76.44. In fact, with trade chatter beginning to include Iran as a perpetrator of the violence against vessels in the Red Sea and potentially the source of money and equipment in the deadly drone attack against US forces in Jordan/Syria, traders should not underestimate the potential for massive price gains if the US and Iran exchange direct fire against each other. At present, some analysts suggest Iranian oil exports are approximately 1 million barrels per day, and interruption of that supply would add to the recent trend of tightening of US crude oil inventories. In conclusion, signs of financial and economic turmoil inside China are likely to restrain the recent upward bias in place throughout the month of January, actual fighting between the US and Iran will trump all other influences and in turn send March crude oil prices quickly to the September highs above $86.
NATURAL GAS
With mild temperatures extended into February in Europe and the US, and concern toward Chinese natural gas demand, the trade simply shrugged off news of a reduction in North Dakota gas production from cold weather. The bull camp and the natural gas industry were extremely disappointed with last week’s US administration’s decision to suspend the approval process for new LNG export facilities. However, the Freeport LNG export terminal shutdown provides ongoing selling interest as some supply is backing up onshore. Granted, the pause in certification for the export facilities is not a near-term physical impact on US supply but it will likely result in some facilities halting construction, investment in natural gas supply will be reduced significantly and the US could cut production dramatically if prices fall significantly below $1.90.
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