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Energies Remain Under Pressure


According to market headlines overnight, energy markets remain under pressure today because of disappointment over US rate cut prospects (which correlates with energy demand) but supported by the prospect of seasonal demand increases. Unfortunately for the bull camp, the crude oil market does not look to see support from the OPEC plus meeting on June 2nd which leaves bearish chart signals in charge. Furthermore, prices have not found support from a 6.4% year-over-year drop in Mexican April crude oil output. While the crude oil market tried to recover from the new low for the move yesterday, buying interest evaporated and prices fell back down to forge new lows on the day signaling the potential for downside follow-through today. Clearly, concerns of slowing energy demand and this week’s increase in EIA and API crude oil supply has prevailed, especially with fresh outside pressure from a higher high in the dollar and from a slight push higher in US treasury yields. We are somewhat surprised that the trade is focused on the prospect of softening US energy demand, especially with a strong summer driving and vacation season beginning next week. Even though we do not see an extension of the OPEC plus production restraint program as a fresh bullish development, continued declines in crude oil pricing could prompt hints of expanding restraint which could bring about a violent bottom next week.


With natural gas significantly overbought from this week’s low to high rally of $0.38 and the net spec and fund short likely reduced dramatically, long term short covering/profit taking is likely to slow. Furthermore, the previous two days have posted large range up moves on very active trading and a decline in open interest which supports the idea of a nearing end to short covering. On the other hand, fresh speculative and physical inventory rebuilding has returned. Furthermore, Asian gas prices posted five-month highs this week with hot weather in India boosting electricity generation demand and a supply disruption from Brunei adding to the bull case.


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