Written Commentary
CRUDE OIL
If it were not for signs of significant energy consumption from the coming US Memorial Day holiday, the crude oil market might have traded lower this morning off an increase in Chinese April crude oil production of 1.4%. Obviously, crude oil prices are undermined by Chinese industrial production and retail sales figures which were not as strong as anticipated and crude oil prices were also undermined because of IEA predictions that global oil demand growth will be slower than expected because of the anemic Chinese economic rebound. However, according to Bloomberg Chinese April apparent oil demand reached a record of 15.09 million barrels per day which in turn is a gain of 24.9% from March. It should also be noted that OPEC output declined 310,000 barrels per day in April because of troubles in Iraq and Nigerian output. The Russians have pledged to cut 300,000 barrels per day this month to reach their OPEC+ production restraint allotment. On the other hand, the IEA indicates the Russians have yet to implement crude output cuts as evidenced by exports posting the highest levels since the end of WWII. The markets should draft support from more reliable news from Saudi Arabia that their crude oil exports will decline next month. Unfortunately for the bull camp, the Iraqi oil minister indicated yesterday that OPEC plus would not likely cut production in their next meeting and that should embolden the bear camp. This week’s Reuters poll pegs US crude oil inventories to decline by 1.3 million barrels and expects the US refinery operating rate to increase by 0.5%. With the rejection and recovery back above the $70.00 level yesterday, the crude oil market appears to have found a value zone but might not be able to extend yesterday’s recovery without assistance from favorable equity market action from a debt deal.
NATURAL GAS
With an upside breakout in natural gas to the highest level since May 1st taking place in the face of a quiet market, we assume the gains are partly short covering of a moderately large net spec and fund short. However, the trade was shocked by news that the US gas rig operating tally declined by 16 rigs to the lowest level in 13 months, with that weekly decline the most in a single week since February 2016. Gas prices should be undermined following a decline below the key $10 level in Asian LNG prices overnight as that weakness is thought to be the result of China increasing its use of coal for power generation. This week’s Reuters poll projects EIA working gas in storage to increase by 104 bcf to 116 bcf and that would certainly be problematic for the bull camp as the shoulder season will continue for at least another two weeks. According to private forecasts, US weather could see above normal temperatures in the days ahead with extremely hot temperatures already registered in portions of the Pacific Northwest.
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