Written Commentary
CRUDE OIL
While crude oil prices at this hour have not posted a higher high, the technical bias from the charts remains up. Certainly, part of recent strength is from the continuation of a broad-based risk on environment. As indicated yesterday, a 1 million barrel plus reduction in daily production would be the largest reduction since the initial Covid lockdown and certainly will remove some supply. On the other hand, according to Reuters OPEC+ producers in August were short of their allowable output by 3.58 million barrels per day and that suggests a 1 million barrel plus cut might not immediately result in less supply flow. As of this writing, it is unclear if the Russian oil minister will attend the meeting as sanctions against Russia could lead to the detainment of the Minister. At present it is unclear what the impact of Ukrainian military victories will have on energy prices from a supply perspective, but the prospect of a nearing end to the war would certainly temper demand destruction fear. Limiting the upside in crude oil prices today is a report from Bloomberg pegging OPEC crude oil production up by 230,000 barrels per day last month. While a US treasury official has indicated new sanctions against Russia scheduled for December 5th are specifically focused on crude oil, it is unlikely that all members of the G7 will comply with new sanctions. This week’s Reuters poll projects US EIA crude oil stocks to decline by 2 million barrels and expects the US refinery operating rate to decline by 0.4%.
NATURAL GAS
Obviously, the action in natural gas this week damages the charts and in turn has seriously ruptured bullish confidence. While the sabotage of key European gas pipelines last week leaves the supply side of the equation volatile, the trade now expects some flow to be returned quickly. Another issue likely to keep pressure on natural gas is confirmation of record US production which has added impetus because of a significant reduction in demand in Florida from reports that 600,000 homes and businesses are still without power. This week’s Reuters poll pegs EIA natural gas in working storage to increase by 94 BCF to 119 BCF which in turn confirms the increased pace of injections during the shoulder season. Significant technical damage on the charts, a lull in weather related supply threats, recent news of record US output and mild temperatures should leave the bear camp in control. However, with natural gas holding a net spec and fund short position of 121,000 contracts early last week and the market extending downward by $0.46, the gas trade has likely become the most bearish since before news of the pandemic surfaced! In a very bearish longer-term fundamental development press reports overnight from Bloomberg suggest US solar energy has now moved to a 33% discount to gas generated power.
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