Written Commentary
CRUDE OIL
Just as we were surprised with the strength yesterday in crude oil prices yesterday in the face of a downbeat global economic environment, we are surprised with this morning’s weaker action in the face of positive global economic conditions. In fact, crude oil prices are trading moderately lower following very positive Chinese PMI data overnight. However, according to the American Petroleum Institute US crude oil stocks last week increased by a robust 6.2 million barrels in the week ending February 24th and that extends a recent pattern of large stock weekly builds and could signal a larger than expected build in EIA crude oil inventories later this morning. On the other hand, weekly crude oil storage in Europe declined by 0.1% with the large weekly increase in Rotterdam supply offset by cumulative reductions in other storage locations. Perhaps the trade is off balance from confirmation that Russian Western ports shipped higher crude oil supply to China last month with a gain of 200,000 tons from January. Going forward, crude oil prices (despite the lack of positive response this morning) should derive lingering support from better-than-expected Chinese PMI data overnight and from fresh confirmation that China will reduce exports of gasoline in March. Furthermore, there are reports that Chinese diesel exports will also freefall this month by eighty percent. Despite initial lower action today, favorable Chinese economic data and a very strong bid for Russian ESPO oil overnight (thought to be of Asian origin) indicates Chinese demand hope is back in place. Rounding out the generally bullish flow of news this morning is a “quite high confidence” from Goldman Sachs of a major oil price spike in the next 12 to 18 months. It is also possible that petroleum and natural gas prices will draft residual support today from reports from Moscow indicating a drone attack attempt on an energy facility near Moscow might have been of Ukraine origin. Going forward, early weakness could be slightly extended if EIA crude oil inventories continue to rise sharply.
NATURAL GAS
In retrospect, we were surprised with the performance in the natural gas market yesterday as overall temperature forecasts remain in favor of the bear camp despite some geographically isolated cold. However, this week it is possible natural gas prices will garner support from news that Ukraine attempted a drone attack on an energy facility near Moscow as that could result in Russia reducing pipeline flow of gas through Ukraine. Furthermore, the monthly EIA energy report for December released yesterday indicated US lower 48 dry gas production declined by 2.3% from November and that should help natural gas prices build a consolidation above $2.00. In our opinion, building consolidation action around the $2 level should deter some sellers, especially with the EIA indicating a decline in US December lower 48 gas production. However, even with the Freeport facility expanding exports winter demand remains average at best and has likely reduced the potential for significant upside price action.
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