Written Commentary
CRUDE OIL
The crude oil market continues to surprise the trade with its ability to discount demand concerns and play down bearish supply headlines. Furthermore, crude oil continues to discount a developing trend of building crude stocks at the EIA, a sharp jump in Cushing, Oklahoma hub supply and a very low US refinery operating rate. Fortunately for the bull camp, the EIA indicated US crude oil production dropped slightly in December as another record monthly production reading could have added to the bearish tone of yesterday’s poor close. Apparently, US refiners are content to extend and prolong typical maintenance periods which could keep US refinery demand for crude oil soft. Perhaps the trade was also cheered by a private forecast that global oil demand will increase by 1.9 million barrels per day, from increased talk of a European rate cut in June and from hope that the upcoming Chinese national party conclave will yield a “large and broad stimulus package.” Other supportive demand talk came from further confirmation of very strong Indian oil imports (and strong Indian economic data) and from evidence of extremely active Chinese trade in derivative contracts. In fact, despite somewhat disappointing Chinese economic data overnight crude oil is likely to forge an upside breakout early today.
NATURAL GAS
In retrospect, the recent rally off the February lows is probably the result of a US EPA ruling which removed existing US natural gas power plants from new stringent environmental rules which are expected to be announced next month. However, LNG prices in Asia continue to remain soft but some traders think low prices have Chinese buyers poised to fill needs especially if a major Chinese stimulus package is announced. In retrospect, we were surprised for the fourth straight session in a row as April natural gas posted four higher highs against a wave of bearish supply headlines. In addition to a return to mild temperatures in the US, natural gas was presented with another significant jump in the EIA inventory surplus to five-year average storage levels and should be undermined by fears US exports will be slowed by problems at a key export terminal (that backs up US supply on shore). Granted, the weekly withdrawal was at the upper end of the range of expectations but seeing the five-year average surplus expand to 26.2% should dramatically increase fundamental resistance.
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