Written Commentary
CRUDE OIL
With the crude oil market overbought from a 4-day low to high rally of $9.00, bearish API crude stocks readings from yesterday afternoon and generally bearish energy demand buzz, the market is vulnerable to corrective action today. In fact, supply and demand headlines over the past 12 hours have added to the bear’s arsenal with Russian crude oil exports not showing signs of declining (as agreed-upon by OPEC+ members) and evidence of further declines in Chinese imports because of refinery maintenance. While Chinese oil demand concerns remain, an issue following Chinese trade data earlier this week, J.P. Morgan suggests bearish supply conditions are the primary bearish force even though overall global demand remains good. Fortunately for the bull camp the petroleum markets in last week’s lows clearly factored in significant softening of global energy demand. Unfortunately for the bull camp, the Energy Information Administration yesterday predicted US crude oil output will increase by 5% this year, but they also predicted fuel demand will increase by 1%. The EIA pegged US crude production at 12.5 million barrels per day for this year and indicated they expect energy demand growth will result in a global oil market balance in the 2nd half of the year. After the close, the API survey said that US crude oil stocks had a weekly increase of 3.6 million barrels which contrasted with trade forecasts calling for a modest weekly decline.
NATURAL GAS
We were surprised with the natural gas market’s ability to post a 5-day high yesterday with the shoulder season between heating and cooling demand reaching its zenith. However, it is possible that predictions of a likely El Nino which could mean much above normal temperatures for the US Gulf Coast and eastern seaboard with above normal temperatures likely for nearly 1/2 of the eastern US running on a diagonal line drawn from New Mexico to Michigan. Unfortunately for the bull camp, the EIA expects US natural gas production this year to reach a record high and for demand to slip. This week’s Reuters poll projects EIA working gas in storage to post a moderate build and that negative is compounded by predictions of a “slightly inactive” and perhaps a “quiet” hurricane season. Despite recent short covering strength, classic supply and demand fundamentals for natural gas remain in favor of the bear camp.
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