Energy Demand Views Shift Negative

CRUDE OIL

The crude oil trade continues to focus on ever changing global demand views and not surprisingly global energy demand views today have shifted negative from US bank sector travails. Obviously, the recent primary focus of the energy trade has been China and the “pace of Chinese energy demand recovery”, but the market is likely to take a break from that focus over the next several sessions. Fortunately for the bull camp, US crude prices on Friday saw US jobs data as a positive demand development instead of cause for fresh economic headwinds from even higher US interest rates. Unfortunately for the bull camp outside market forces are likely to prevail over internal energy market fundamentals at least into midweek. In fact, if inflation readings are residually hot, we think that will ignite a wave of massive risk off selling in equities and commodities. Nonetheless, crude oil should garner some support from a 9% decline in weekly crude oil in floating storage readings especially with further evidence of very strong Indian energy demand last month surfacing in the headlines this morning. Unfortunately for the bull camp, April crude is flirting with severe damage on its charts again this morning while option skews have also shifted very bearish which in turn could result in April crude oil retesting the late February low down at $73.80. In fact, supply news also favors the bear camp with Iran over the weekend indicating its crude oil sales reached the highest level in 4 years with officials indicating net revenues of $14 billion over 11 months with 83 million barrels more sold this year than last! Another negative story from the weekend came from Saudi Aramco plans to expand operations and increase supply flow to refineries. With the net spec and fund long positioning in crude bouncing over the last several reports and likely expanded further with the rally into last week’s high, the crude oil market remains very overbought and remains vulnerable despite last week’s setback off the high of more than $6.00.

NATURAL GAS

The short covering bounce off the February low has obviously been reversed, and seeing the media declare the end of a winter gas shortage disaster, that should give the bear camp confidence to press prices back to contract lows. As was experienced last week, weather forecasts in North America and Europe have contained pockets of below normal temperatures, but the typical seasonal upswing in temps is underway which should result in slower consumption and higher stocks on both sides of the Atlantic. Last week’s Baker Hughes US gas rig count declined by one with 153 rigs operating. On the other hand, there are now reports from oil companies indicating they are set to cut the number of rigs drilling for gas because of low prices. With average inventory levels 21% above the 5-year averages and the year over year change in US EIA working gas in storage at +500 billion cubic feet, the chance of developing tightness is remote. With the natural gas market from the last delay COT positioning report forging gains of nearly $0.85, the large net spec and fund short position has likely been balanced, increasing the chances of a fresh bulge of selling ahead. The path of least resistance is down with a return to the February contract low likely without a very surprising headline development.

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