Written Commentary
CRUDE OIL
Not surprisingly, crude oil prices have started off under noted pressure today following disappointing Chinese growth projections from a national party Congress. With the Chinese planning conference projecting growth at only 5% in the kickoff to its annual government meeting, targeting growth significantly below the growth expected in India, the intensive focus on Chinese demand could be moderated. On the other hand, the Saudis have increased their oil prices to Asia more significantly than in other areas. Apparently, energy demand concerns are also being raised by expectations of hawkish US Fed reserve testimony tomorrow. Fortunately for the bull camp weekly crude oil in floating storage declined by 6.1% but support from that news is mitigated from significant gains in storage in Asian-Pacific and European facilities. With strong China economic data released early last week, (the extremely strong Chinese service sector reading for February was the strongest in 6 months) that should extend demand optimism ahead. While the EIA has explained some of the significant jump in US oil inventories recently as balancing of crude blending, and recent underreporting, it is clear the US internal supply will keep headwinds blowing against WTI prices. Fortunately for the bull camp, the US oil rig count declined by 8 rigs in the most recent Baker Hughes count putting activity at the lowest level since last September. Another bullish development likely to bring support into this week are rumors last week of the UAE exiting OPEC which would certainly reduce the cartel’s capacity to support prices. On the other hand, if the UAE simply wants production autonomy, that could result in a steady increase in their output. While Chinese demand will continue to be the primary daily driving force for energy prices, Indian economic news, global equity market action and upcoming global inflation/jobs data will grow in importance throughout the week until jobs data on Friday.
NATURAL GAS
With some signs of slower industrial activity in Europe, a slight downward adjustment in Chinese growth forecasts, further builds in US EIA gas inventory storage levels last week and mild temperatures on both sides of the Atlantic, the corrective reversal this morning could gather momentum. However, a cold snap has impacted UK to EU gas flows temporarily. Even though there has been significant Press coverage of the reopening of the Freeport, Texas LNG export facility, those flows have not prevented EIA working gas in storage to build to a large surplus of 19.3% above the five-year average! As indicated, a large portion of the last several weeks buying was likely short covering/profit-taking especially with open interest and trading volume declining on the late February early March rally in prices. At this point, we do not see fundamental justification for the recent upside action in natural gas prices and therefore the setback today is not surprising. In fact, mixed cold and mild temperature forecasts project average consumption and gas flows from Russia through Ukraine continues at a normal pace.
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