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Crude Oil Vulnerable to Selling

CRUDE OIL

Given the complexity of financial sector problems, increased cooperation between China and Russia, a larger than expected build in API crude oil stocks yesterday and given the bounce off the Monday low we see crude oil vulnerable to selling today. In fact, if the Fed manages to navigate today’s decision without causing a massive risk off event that should be considered a heroic effort. Certainly, one would think a pause in hiking rates would benefit crude oil and physical commodity markets but that is not a given in the current financial mess. Granted, it is a positive that Chinese refinery activity continues to run strong, but China continues to heavily purchase Russian oil instead of Western oil and that creates headwinds for WTI and Brent crude. However, seeing China continue to buy/consume significant quantities of oil should be seen as a signal of growth in the Chinese economy which ultimately helps build a solid low around the $65.00 level. Overnight the market was presented with news of a 2.1% week over week increase in European crude oil in storage and that bearish supply news is accentuated by the 3.3-million-barrel API stock build yesterday afternoon. While Russia’s deputy prime minister indicated that his nation would hold to their crude production cuts through June, those words are largely ignored given the lack of promised March production cuts. After the close, the API survey showed US crude oil stocks had a weekly increase of 3.26 million barrels which contrasted with trade forecasts for a moderate weekly decline.

Offshore Oil Rigs

NATURAL GAS

While natural gas prices were able to survive a retest of their late February lows, the market remains firmly at the bottom of its December/March downtrend. While May natural gas saw midsession pressure yesterday and fell to a 32-month low, it regained strength from a significant amount of short-covering and finished Tuesday’s trading with a moderate gain and a daily reversal. With the North American winter heating season approaching its end, residential, commercial, and industrial gas demand has been on the decline. The latest 6 to 10-day and 8 to 14-day forecasts have below normal temperatures from the Rockies west to the Pacific Coast, and that may provide a late spike in heating demand for those areas. Europe is also nearing the finish of their heating season, as they have been able to weather the loss of Russian supply by a significant cut in their gas usage. While the Freeport LNG export terminal has resumed operations, it is more than 1 bcf per day below full capacity, so the potential for increased US LNG exports is pushed back into the second quarter. A positive daily reversal from a 32-month low should lead to early upside follow-through, and that in turn could trigger additional short-covering early in today’s action. If the FOMC meeting results can lead to a “risk on” mood in global markets, natural gas prices may be able to extend a recovery move in front of Thursday’s EIA storage report.

 

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