Written Commentary
CRUDE OIL
In our opinion crude oil is lucky to have avoided even larger losses this morning as standard cyclical energy demand fears have been surfacing from widening recession expectations and that news has been joined by fresh Chinese Covid 19 restrictions. While not a front and center issue recently unending strength in the dollar is likely costing the US some international oil sales business. Fortunately for the bull camp, the US jobs report was strong enough to temper fears of recession from over tightening by the US Fed. It should also be noted that net spec and fund long positioning in crude oil has fallen sharply since the June highs and could reduce downside volatility ahead.
Like the crude oil market, we see the gasoline market facing a potential demand destruction liquidation threat in the event the Chinese government puts large areas of Shanghai in lockdown. While seasonal demand will remain strong, that issue will not lift prices without a very broad-based risk on market environment holding in place. On the other hand, US retail gasoline prices saw the biggest one-day decline since the financial crisis with pump prices falling 3.1 cents late last week. Going forward, we see gasoline stocks in the US beginning to repair with the recent spike up in the refinery operating rate combined with a slight softening of seasonal demand likely to extend the recent pattern of narrowing of gasoline inventories versus year ago levels for a fourth straight week in a row.
NATURAL GAS
Underpinning natural gas prices to start the week is a planned 10-day maintenance shutdown of the Nord Stream One pipeline and a widespread area of much above normal US temperatures (6-10 and 8-to-14-day forecasts). Some flow from Russia is restricted due to a damaged turbine, and the acuteness of the impact is clear with Germany moving to its 2nd highest stage of supply emergency. Even ahead of the shutdown later today, capacity of the Nord Stream One pipeline was off by 40%. In a disastrous demand destruction forecast, economists suggest a complete halt of Russian natural gas exports could cause Germany a loss of 12.7% of growth! In a potential positive development, four of the largest US LNG exporters have solicited the US administration to exempt some pollution rules that some industry experts suggest could result in a significant shutdown of US capacity ahead if the companies comply with environmental rules.
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