Written Commentary
CRUDE OIL
Like other markets yesterday, the crude oil market tossed off early pressure and recovered aggressively in the wake of a distinct 180-degree shift in overall market sentiment. However, the surprise Bank of England intervention effort is unlikely to eliminate energy demand concerns, especially with respect to China. On the other hand, OPEC+ is reportedly discussing cutting output at next week’s meeting, EIA crude oil stocks declined (instead of posting a large inflow as seen from the API) and the product markets all showed significant EIA outflows this week!. Dialogue from Russian officials earlier in the week suggested OPEC+ should cut production by 1 million barrels per day. In fact, it should also be noted that EIA implied gasoline demand reached the highest level in 6 weeks yesterday.
At least in the near term, the US Midwest refinery fire, very minor reductions in US Gulf region refinery activity because of the storm, the strongest US implied gasoline demand in 6 weeks and a larger than expected decline in weekly EIA gasoline stocks provides gasoline with fundamental support. Furthermore, European traders are expecting tightening of product supplies ahead as refinery activity falls because of a lack of crude oil feedstocks. It should also be noted that the September consolidation pattern above the $2.30 level in the November gasoline futures contract should provide solid technical support for the market. Unfortunately for the bull camp, the surprise central bank intervention yesterday is not likely to result in a sustained paradigm shift away from slowing fears and rising rate anxiety. Furthermore, China continues to show signs of significant product exports and the next critical US holiday driving window is nearly 2 months in the future.
NATURAL GAS
Without the mysterious Baltic Sea pipeline explosions, classic demand signals clearly favor the bear camp. First and foremost, the markets are faced with the center of the shoulder season in the northern hemisphere with the combination of cooling and heating needs likely to remain low for several more weeks. However, while the damaged pipelines were not carrying gas at the time of the explosions the operator of the pipelines labeled the damage as “unprecedented” which likely means supply flow will not be seen through the line anytime soon. In yet another supply threat, the Russian national gas company is threatening to break ties with the Ukrainian company responsible for the only remaining Russian gas flow to Europe.
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