Written Commentary
CRUDE OIL
The gains off the early January low are likely the result of the improvement in global economic psychology and improved optimism toward Asian demand. However, overnight Reuters has indicated January flows to Asian buyers show signs of coming in 2% below December readings. Obviously, the energy trade discounted a shockingly large inflow to API crude oil stocks of 14.9 million barrels! It should also be noted that gasoline and distillate stocks rose moderately. Therefore, higher price action this morning indicates residual bullishness in the market. Other bearish developments ignored overnight are predictions that US 2023 oil production will post a new record over 12 million barrels per day and a forecast from Macquarie predicting a 3rd quarter oil market surplus of 1.5 million barrels per day! While we think the crude oil market forged a very significant low in early December from the $70.00 per barrel level, seeing prices rally consistently from current levels will likely require sustained economic optimism. The crude oil market might have been limited in both directions yesterday as the EIA Energy Outlook presented a mix of increased production forecasts for this year and positive demand readings. As for the upcoming EIA weekly report, the Reuters poll has projected crude stocks to decline by slightly more than 2 million barrels, but that number is highly suspect given the massive jump in API stocks yesterday. In conclusion, energy prices in the coming 36 hours are likely to take significant direction from macroeconomic psychology.
NATURAL GAS
As indicated earlier in the week, fundamental conditions in natural gas probably mean that rallies will largely be short covering affairs and limited in magnitude and duration. Certainly, European temperatures have turned cooler but are not extreme enough to offset mild US temperature forecasts. The bull camp should be heavily discouraged from bottom picking given this week’s Reuters poll projecting a very atypical small weekly decline in US natural gas storage. In fact, a Reuters poll pegs gas stocks to decline by around 31 BCF which would be the smallest draw since the beginning of the heating season! As in many other physical commodities markets, natural gas price action in the coming 36 hours is likely to be largely set by big picture macroeconomic sentiment and the latest market assessment of Fed policy. However, classic fundamentals remain bearish with the biggest ally of the bull camp a significantly oversold technical condition and the attempt to build a consolidation pattern.
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