Written Commentary
CRUDE OIL
While overall global macroeconomic sentiment is not creating massive risk off selling in many commodity markets, the crude oil market has ranged down sharply and is likely to continue to fall. In fact, disappointing demand news recently has been accentuated by reports overnight that Saudi Arabia has cut Asian crude prices to 20-month lows! Seeing softer than expected Chinese manufacturing PMI data overnight certainly provides fresh evidence of weaker Asian oil imports in the near term. Unfortunately for the bull camp the supply-side of the equation has also provided some pressure as signaled by front month WTI spreads expanding to a $0.12 contango. Furthermore, Russian crude oil flows to the world market have remained high despite recent signs of a slight reduction. On the other hand, Russia’s deputy prime minister instructed refiners to make sure at least ample fuel supply were available in local markets as that furthers the idea that Russian fuel exports are set to weaken. While we were surprised with the magnitude of the declines this week (given a relatively stable to slightly positive US debt ceiling condition) the markets are justified in correcting more of the significant low to high recovery in crude oil of $10.00. With the $5 rally off the mid-May lows largely the result of Saudi threats against those shorting the market into the OPEC plus meeting, seeing Russia indicate there would be no production change in the coming meeting on June 4th justifies the full removal of the Saudi prompted rally. In short, we expect bearishness from slumping demand expectations to extend through today’s trade.
NATURAL GAS
With the natural gas market extending last week’s slide into today’s action, US cooling demand low into the end of May and the market lacking definitive bullish reasons to call for a major low, the path of least resistance remains down. In fact, Chinese LNG buyers think lower prices are ahead and that is prompting them to hold out for even lower prices. Certainly, the natural gas market has a net spec and fund short position of significance, especially with that reading understated due to the post report washout of $0.29. According to weather services normal US temperatures look to return across a large portion of the US through June 7th and that forecast should embolden sellers. The path of least resistance is down with supply in the US and Europe bearish while cooling demand is bearish to prices. In the near term we expect July natural gas prices to breakout down but also expect selling exhaustion to take place quickly.
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