Written Commentary
CRUDE OIL
Even though the energy markets yesterday showed strong recovery action off spike lows, the crude oil market displayed the least impressive bounce and is showing early indecision. However, crude oil did forge its recovery through bearish EIA data and in the face of deteriorating global macroeconomic psychology. Fortunately for the bull camp the market has been presented with signs that Chinese oil demand is strengthening, a 5-month low in Saudi November oil exports and signs that the US might succeed in extending the Russian price cap at $60.00. Furthermore, buying by a Chinese national oil company (Unipec) has added to the signs of strong demand early January Chinese oil consumption. However, upside action ahead is likely to be restrained with macro headwinds increasing. Furthermore, the US crude oil stocks gain was the largest jump in 18 months and that follows a near record jump last week. In a development that might impact petroleum products more than crude oil, a nationwide strike in France has halted deliveries from refineries operated by two major companies. On the other hand, seeing refinery intake fall ahead could dampen French buying interest for crude imports in the short-term. In the wake of this week’s internal crude oil market fundamental developments, the bull case has deteriorated from both supply and demand perspectives. Certainly, deteriorating demand views can reverse suddenly, but economic anxiety is on the rise and China has entered a massive holiday migration that could cause significant Chinese energy demand fears next week.
NATURAL GAS
While it is possible that a slight extension of cold temperatures in Western Europe and ongoing cold in portions of the US contributed to the market’s reduction in downside momentum the path of least resistance in prices remains. However, there should be some support from a recent reduction in the amount of Russian gas supply flow through Ukraine. Even though the weekly EIA gas in storage withdrawal was closer to the upside of the range of expectations, seeing a mid-January draw nearly one-third of the size posted 2 weeks ago clearly highlights slack demand from generally mild temperatures. Over the last four weeks, natural gas storage has declined 505 bcf. It is difficult to project anything but further downside action as US supply currently sits 1.2% above 5-year average stock levels, macroeconomic conditions are deteriorating, and intermediate forecasts do not have extreme and or entrenched cold temperatures.
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