Written Commentary
CRUDE OIL
Clearly, the risk off environment from last week continues to deflate hope for improved energy demand. In fact, the hope for “improved” demand has shifted into fear of “contracting” demand. However, traders should remember headlines this morning suggesting that energy prices are also under pressure because of anticipation of a US Federal Reserve “rate hike” on Wednesday as the failure to hike rates could provide crude oil with a reason to bounce later this week. Without the benefit of recent COT spec and fund long position readings, we can only estimate the spec and fund long in crude oil has reached the lowest level since 2013. However, seeing another financial institution threatened will extend energy demand fears and keep sellers pressing the short side. Given the rapidly expanding fear of contracting global energy demand, news that global crude oil in floating storage increased by 2.6% over last week adds to the negative environment. A potential psychological (instead of material) bullish development would be news of the US government beginning to buy back supply for its strategic reserve. Realistically seeing metered buying for the US SPR is not enough on its own to result in a change of sentiment in the current marketplace. In fact, without several bullish internal fresh fundamentals and more favorable macro conditions, SPR buying might simply be ignored. Speaking of internal fundamentals, the supply flow news from Russia is bearish with signs that March production has not dropped as predicted by the Russian oil minister. Even the demand side of the equation (beyond macro influences) is bearish as Chinese economic data and other evidence of building recovery in the Chinese economy have been reduced by the last of a Chinese rate cut. In the end, liquidation pressure should slow unless US equities extend last week’s financial market fear aggressively.
NATURAL GAS
Last week we became progressively more bearish toward natural gas with weather/temperatures mixed to bearish with pockets of cold discouraging sellers, but not encouraging buyers. On a year over year basis, natural gas supplies in the US are holding the highest surplus since the beginning of 2020 and should have passed the typical tightest/lowest seasonal supply period of the year. Also as indicated last week, European storage levels remain above 55% of capacityvirtually removing a severe winter shortage threat but not ruling out the potential for heavy European demand in the months ahead to refill for summer cooling demand. While nothing new, the Russian national gas company Gazprom continues to ship gas to Europe through Ukraine pipelines despite a significant escalation in fighting between the two countries. In our opinion, even with a prediction of sustained cold temperatures in North America or Europe, the potential for a winter tightness scare continues to fall with each passing week. Furthermore, seasonal temperatures should continue to rise thereby reducing the aggregate consumption.
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