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Crude Prices Break to the Upside

CRUDE OIL

With prices breaking out to the upside this morning in the face of news of record Chinese offshore oil production, the markets focus is clearly on the potential for a supply disruption in the Middle East following onshore attacks in Yemen by US and UK forces. Historically, attacks inside Arab countries severely heighten in tensions and certainly increase the odds of a broadening of the participants involved in the conflict. It should be noted that the news of record offshore Chinese oil production was offset by news that Chinese 2023 oil imports were a record, especially as that news was accompanied by signs of a recovery in Chinese fuel demand. Along those lines, Chinese December crude oil imports jumped which in turn resulted in crude oil imports year-to-date rising by 11%. In another fresh bullish demand development Chinese December purchasing prices fell 3.8% versus year ago levels with fuel prices dropping by a very significant 7.2% versus year ago levels which should help the Chinese economy and stir some fuel demand inside the country. From the supply side of the equation the trade obviously sees the aggressive retaliation by the US and UK with airstrikes inside Yemen as a development escalates the prospects of reduced supply flows.

Oil Rig

NATURAL GAS

Not surprisingly, the natural gas market saw the bull camp come back into a measure of control yesterday following a larger than expected withdrawal from EIA gas in storage. However, we are somewhat disappointed in the magnitude of strength this morning following reports that European inventories have plummeted from recent cold temperatures. The bull camp is further assisted by talk of record US demand LNG and therefore gas could see a very strong finish to the week especially given the extreme cold in a large cross-section of the US this weekend. Over the last four weeks, natural gas storage has declined 328 bcf. The EIA report saw a 3.33 tcf decline which was largely the result of large outflows from the East, Midwest, and South-Central US. The market was also presented with evidence of record US gas demand with domestic consumption and exports for the first half of January reaching 171.4 bcf/day which is much higher than the previous record usage of 162.5 bcf/day in February 2021.

 

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