Written Commentary
CRUDE OIL
Despite ongoing concerns of slumping Chinese demand due to ongoing Covid activity restrictions in China, reports overnight from Australian indicate that Asian crude oil imports last month likely reached a record level. We continue to think the recent run-up in prices off the looming implementation of the Russian price cap is misguided and will eventually be extracted. However, crude oil prices are likely to gyrate in the near term as the trade speculates on where the actual price cap will be set. According to Bloomberg reports overnight, a price cap of $65/$70 will have little adverse impact on Russian oil export revenues. Certainly, this week’s large draws in EIA and API crude oil inventories are supportive but combined with a refinery operating rate of 95.2% (the highest since 2019) that should mean additional US product supply is on its way to the market. However, the US continues to have net imports of 1 to 2 million barrels per day and that has not stopped an expansion of the year-over-year crude stocks deficit. All major US product stocks remain at year-over-year deficits. EIA crude stocks fell 12.581 million barrels and are 14.027 million barrels below year ago levels. Also, crude stocks stand 32.819 million barrels below the five-year average. Crude oil imports for the week stood at 6.037 million barrels per day compared to 7.063 million barrels the previous week. The refinery operating rate was 95.20% up, 1.30% from last week compared to 88.80% last year and the five-year average of 89.64%. From a longer-term perspective, the EIA yesterday indicated overall US crude oil production increased by 289,000 barrels per day in September to a total daily production figure of 12.2 million barrels per day. According to the EIA, North Dakota posted a 4.1% increase in September output which was the highest since March, New Mexico output increased by 4.7% to an all-time high and production in Texas increased by 1.8% and reached the highest level since March of this year. If the markets are anticipating a reduction in production from the December 4th OPEC plus meeting, we suspect gains this week will be reversed next week.
NATURAL GAS
Clearly, the natural gas charts were severely damaged yesterday with a 6-day low breakout. Apparently, moderating temperatures in the US and Europe ahead were compounded by news from the EIA that September US natural gas production increased by 0.7% in September to 111.18 bcf. Another major negative for natural gas prices came from a report indicating European imports of Russian gas has jumped by 42% during the Russian “special operation”. With the severe damage on the charts yesterday, slightly warmer US/European weather forecasts, and higher US lower 48 production we favor the downward track. However, the last COT positioning report showed a net spec and fund short of 143,341 contracts and the market is currently $0.37 below the level where that short was measured. Initial downside targeting in January natural gas is $6.57. This week’s Reuters poll projects EIA natural gas in storage declining by 70 to 92 bcf, but until the damaged Freeport export facility returns to operations, US natural gas supplies are likely to see small incremental declines.
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