Written Commentary
CRUDE OIL
The outlook for the crude oil market remains in favor of the bull camp into the new trading week. In fact, with early signs of strength and a trade above Friday’s strong finish should leave the bear camp on a back foot. While we have doubted the effectiveness of the Russian oil price cap an extension of the price cap probably provides a measure of lift to prices. The bull camp should be emboldened by recent demand news flow documenting strong demand from India and China with both countries indicating they will boost imports this year. News that money managers have boosted bullish positions on both Brent and WTI adds substance to the January rally. In a fresh supportive supply-side development, crude oil in floating storage (from global tanker readings) last week declined by 1.09 million barrels. Most importantly Asian-Pacific floating storage declined by 9.7% on a week over week basis with European supply dropping by 17. Offsetting the positive demand views from surging Indian and Chinese imports is a massive jump in US Gulf Coast floating supply last week of 213%. As indicated in other market coverage today, Chinese officials (in reportedly leaked information) predicted 80% of their population was likely to become infected and while that could produce very concerning demand headlines in the near term, the markets could see the potential for a “peak” in infections as a powerful bullish potential. Going forward, two straight weeks of significant inflows to EIA crude oil inventories of 27 million barrels will create significant interest in this week’s EIA report. In fact, with the US refinery operating rate remaining very low, the prospect of another large weekly inflow of crude oil supply should be expected.
NATURAL GAS
While the declines in natural gas have slowed, the trend remains down. The attempt to consolidate above the $3.00 level in the March gas contract is probably partly the result of a massively oversold technical condition and might also be partly the result of cold in the US. However, with a very large net spec and fund short in natural gas growing on a week over week basis, it is possible that some shorts are exiting with profits around the $3.00 level for fear that the euro zone’s gas price cap could result in significant shift in market structure ahead. Adjusted to the $0.27 decline after the last COT report was measured, we see the net spec and fund short in gas at the largest level since February 2020. With the net spec and short long becoming significantly very oversold and open interest reaching the highest level since last June, there are technical signs of a bottom in prices. While last week saw reports of reduced Russian gas flow through Ukraine pipelines, the trade at present is unconcerned about a supply debacle in Europe. In retrospect, seeing US EIA working gas in storage levels rise above 5-year average stock levels last week (in the middle of January), should make it extremely unlikely severe US tightness will develop before temperatures begin to swing higher.
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