Written Commentary
CRUDE OIL
Crude oil followed through on Monday’s late pullback and was finding moderate pressure early this morning. The sizable increase in new Covid cases in China may push back their reopening even further, and that has a negative impact on the global energy demand outlook. With crude oil surging through the latest wave of global central bank rate hikes and extending its gains into the US election, today’s energy price action could be heavily impacted by geopolitical events rather than internal market factors. Given such a wide range of possible election outcomes, volatility in the dollar could be quite significant, causing wide gyrations in both directions and possibly remaining that way for several trading sessions. So far, the Russian president has not definitively threatened to respond to the growing push for a price cap. With some rumor mills talking about peace talks, prices would be vulnerable to aggressive liquidation if there are any signs of a Ukraine/Russia cease-fire or any interest in talks. This week’s Reuters poll projected US crude oil stocks to show an increase of 1.1 million barrels last week after last week’s EIA report showed a surprisingly large draw. However, the year over year deficit in EIA crude stocks has narrowed consistently over the past four weeks, with gasoline, distillate, and diesel stocks continuing to hold large deficits to year ago levels. Last week, crude oil closed above the 100-day moving average for the first time since the end of June, which could begin to spark buying signals from long-term trading systems. Unfortunately for the bull camp, Bloomberg yesterday noted significant oil export flow gains from Saudi Arabia and Iraq.
NATURAL GAS
Natural gas prices started out on the defensive overnight and have remained under significant pressure into this morning. We were surprised by the magnitude of the gap up trade yesterday, as the severe cold blast headed to the US might not last long enough to have a material impact on the backed-up US supply. Recent weekly EIA injections have generally been above 100 bcf, and the deficit to the 5-year average has shrunk to a mere 3.7%. The cold front will likely end the US injection season, but without a shift into much colder temperatures in Europe, we doubt gas prices can sustain their strength off the weather alone. Expectations for this week’s Reuters poll project EIA natural gas in storage to show an increase of 83-101 bcf. It will be difficult for the market to climb above Monday’s highs, Russian gas continues to flow through Ukrainian pipelines, Putin has made fewer recent comments, and the potential storm threat to US Gulf production is minimal. On the other hand, the trade has apparently embraced a forecast for a cold November.
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