Crude Volatility Likely to Continue
We expect volatility in crude oil to extend into the new trading week, with fears of demand destruction periodically surfacing in the face of the potential for OPEC+ to reduce output by one million barrels per day. The bullish reaction in prices early today is likely the result of trade talk that the OPEC+ production cut could exceed 1 million barrel per day level. However, OPEC+ members have been unable to produce to their production ceilings, and therefore a reduction in allowable output will be easily complied with. Adding into the bull case this morning is a 17% week over week decline in global crude oil floating storage. In an under the radar bullish development the trade has been presented with signs of significant cutbacks in Russian oil exports with Russian Arctic exports falling to a 9-month low (that could be seasonal) and reports that Russian Pacific shipments have reached multiyear lows. However, China is in a weeklong holiday and global energy demand expectations are reduced further by swirling European financial sector concerns. As in many other physical commodities markets, the crude oil market remains moderately liquidated with the net spec and fund long recently reaching the lowest level since 2016. Last week, the US oil rig operating count increased by two, but Baker Hughes pointed out that US oil and gas rig activity growth slowed to the lowest level in two years. While Hurricane Ian disrupted some US production and shipping, we suspect that supply is back online.
In our opinion, the natural gas market will continue to correct off weakening shoulder season demand, record US gas production, and from reports that Russian gas flows remain steady today. We also see thickening resistance in US gas prices following a larger than anticipated EIA working gas in storage injection reading last week and from the likelihood that gas supply in the US backed up because of the hurricane last week. However, with the Nord Stream 1 pipeline shuttered before the explosions hit other pipeline sections last week, and the Russian national gas company seemingly poised to break off business relations with the only major remaining Russia to Europe pipeline (through Ukraine), it certainly appears Putin is using energy as a military weapon. On the other hand, weekend reports show the Ukrainian state gas company bookings for October 3rd increasing over October 2nd. The weekly Baker Hughes rig operating count pegged natural gas drilling to have declined by one. Even though the natural gas market has maintained a significant net spec short position since March 2021 adjusted for the post COT report action last week the spec short and could now be the largest since early 2020 at the start of the pandemic.
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