Written Commentary
CRUDE OIL
The downside breakout and extension in crude oil this week is clearly justified by a significant deterioration in global economic sentiment and given definitively injured charts. In fact, global recession forecasts have multiplied this week, with some economists predicting deep global recession. A minimally supportive overnight development for crude oil came from a Bloomberg report predicting significant demand for European “refinery oil” as users shift from very expensive gas to oil. The Bloomberg report suggests refiners will save $3.80 per barrel by shifting from gas to oil and fully replacing gas with oil would consume an added 200,000 barrels of oil per day. Furthermore, estimates predict a noted rotation in feedstocks would result in a 40% jump in European oil product usage. However, the bear camp should be emboldened by overnight reports highlighting reduced traffic patterns in Europe and China.
An oil pump jack
As indicated in crude oil coverage this morning, traffic congestion reports project softer European and Chinese fuel use. However, signals of a possible shift from European natural gas use to oil product use provides fundamental support for all products. The very aggressive downside extension in gasoline is justified by softening seasonal demand patterns, fears of demand destruction from a global recession and from a weekly increase in ARA product inventories. Weekly ARA stock levels saw gasoline, fuel oil, gas oil and naphtha stocks rising, with jet fuel stocks declining. With the last COT positioning report in gasoline showing a jump in the net spec and fund long and that net long at 50,278 contracts, the odds of further stop loss selling are high.
NATURAL GAS
In our opinion, the US weather outlook gives the bear camp in natural gas a slight edge today as does the larger than expected weekly injection into EIA storage levels yesterday. The weekly natural gas storage report showed an injection of 41 bcf which was larger than expected. Total storage stands at 2,457 bcf or 12.1% below the 5-year average. Over the last four weeks, natural gas storage has increased 146 bcf. On the other hand, natural gas prices should be cushioned from signs that the Russians have indeed fabricated the accusation that the necessary turbine to run the Nord Stream 1 pipeline is faulty.
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