Written Commentary
CRUDE OIL
At this point the energy complex is likely locked in a downward motion unless a fresh and significant supply threat materializes. As of this writing, the most threatening supply issue is the approach of tropical storm/hurricane Ian, but that storm track has been consistently shifted away from Gulf of Mexico production areas. Certainly, some disruption of shipping and oil platform activity is likely given precautions already undertaken, but lasting supply disruption is unlikely at this time. Movement toward a price cap on Russian oil by the EU has failed to spark threats from Putin and has also failed to support crude oil prices in the early going. The bearishness in the market is so definitive that talk of a proactive move by OPEC+ to support prices with a production cut back has failed to garner headline status.
While the gasoline market rejected a sub $2.30 trade last week and temporarily held well above the early September low, the outside market pressure from falling crude oil and deteriorating macroeconomic issues leaves significant pressure on prices. However, recent mobility readings showed decent demand and a refinery fire in the US last week provides cushion to gasoline prices. At the end of last week, retail pump prices in Indiana increased by $0.06 in a single day prompting sharp jumps in Ohio and Michigan retail pump prices. According to Bloomberg US Midwest fuel supplies were already extremely tight at 44 million barrels, which is the lowest reading in 24 years. Furthermore, with the BP refinery fire resulting in two deaths, Midwest gasoline supply should be expected to tighten further and in turn provide cushion to gasoline futures prices.
NATURAL GAS
Apparently, fear of further Russian gas flow reductions has been pushed to the sidelines off ideas that slumping global demand will make shortages caused by Russia less significant. Last week US gas drilling rig activity saw a decline of two rigs to stand at 160 rigs operating. Fortunately for the bull camp, the net spec and fund positioning in natural gas prior to the aggressive slide of $0.90 was already heavily net short potentially leaving the net spec and fund short at the largest level since March 2020 if adjusted into the lows this morning! As indicated already tropical storm activity has increased significantly over the last week with Ian potentially threatening Gulf of Mexico oil infrastructure by early Wednesday US time. In fact, it is possible that Ian could become a category 3 hurricane on midday Tuesday US time. However, the anticipated track of the storm will likely skirt the far eastern edge of production areas.
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