Written Commentary
CRUDE OIL
With a range down probe overnight mostly rejected, the trade has partially discounted cease-fire talks in Egypt. However, the crude oil market was presented with bearish overnight news of a Petro China quarter over quarter production gain of 3.3 million barrels. While the energy markets are likely to see residual support from ongoing Israeli airstrikes against Hamas, the weekend presented several classic bearish supply and demand developments. First, Indian March crude oil imports dropped by 1.1% versus year ago levels, and strong demand from India has been a key component of the bull case. From the supply side of the equation, the Mexican national oil company Pemex reversed crude oil export cuts for next month after recently indicating they would attempt to refine all domestic produced oil in country. Crude oil should see support from a 17% week over week decline in global crude oil in floating storage and from ongoing attacks on Ukraine and Russia energy infrastructure. While last week’s net spec and fund long position was 92,000 contracts below the last three-year high net spec and fund long, the market into the Friday high gained $1.10 indicating the net spec and fund long report this week understates the magnitude of the net long. Nonetheless, the crude oil market retains speculative buying capacity if fundamentals remain supportive. While tensions between Israel and Iran could flare-up at any second, reports have a Hamas delegation visiting Egypt seeking a cease-fire. The Israelis are indicating they needed to eradicate Hamas, and it is possible they will intensify attacks to complete their mission before international pressure for a cease-fire becomes intense.
NATURAL GAS
Despite significant short and long-term oversold conditions, the fundamental path of least resistance in natural gas remains down. Last week’s “above the range” of expectations weekly injection to EIA gas in storage combined with mild shoulder season weather in the US and Europe leaves the bear camp in control. From a longer-term perspective, natural gas prices could bottom out after a plunge to even cheaper levels as there are signs that demand for US supply is robust and is likely to expand. The bull camp might see fleeting support from a Bloomberg story overnight suggesting the Texas electric grid will see capacity issues in the long summer season ahead. However, the US has had trouble maintaining capacity export flow and needs additional export terminal capacity to begin to eat away a wall of US supply. However, with potential of adding US export capacity by June or July that should help the trade discount a large surplus to 5-year average inventories.
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