Written Commentary
CRUDE OIL
Evidence that Chinese energy demand prospects are much more important than energy demand prospects from the rest of the world were on display this week with the crude oil market posting a pattern of higher highs and higher lows. In fact, energy prices clawed higher despite renewed US rate hike threats and continued expansion of US crude oil in major US storage facilities. However, the EIA reported record US crude oil exports of 5.6 million barrels per day while net US crude oil imports dropped to a record low of 600,000 barrels per day. With lower export flows from Russia, Brazil and Iraq, interest in US supply is likely to expand ahead. In fact, the impact of sanctions against Russia are now expected to reduce Russian production because of a lack of necessary parts, operating equipment, and foreign service to the Russian oil production industry. Along those lines Russian revenues from oil and gas fell by 46% in February on an annual basis because of sanctions. It should also be noted that US crude oil prices managed yesterday’s upside breakout in the face of a 120,000 barrel per day increase in OPEC February crude oil output and in the face of a dip in this week’s Bloomberg daily Road traffic readings in China. While it might be jumping to an overly negative conclusion, talk of a possible US Chinese trade war following the potential for expanded US sanctions of China would certainly call strong Chinese energy demand forecasts into question. Even though energy prices are likely to derive some support from the overnight risk on vibe flowing from strength in global equities, prices are overbought and showing early signs of corrective action.
NATURAL GAS
The consistent pattern of higher highs in natural gas prices this week is very impressive but has not been fully supported by fundamentals capable of projecting a sharp sustained price recovery. However, given the historic washout in prices from last June and likely a record net spec and fund short positioning, it is not surprising to see prices mount ongoing and noted short covering gains. It was certainly positive to see natural gas prices yesterday maintain a positive chart structure following a smaller than typical winter withdrawal from EIA natural gas in storage of 81 BCF. On the other hand, cold weather has surfaced in Europe and market expectations predict record US export flows today at least partially because of the ongoing recovery of the Freeport facility. We also think there is the potential for additional Ukrainian drone attacks deep inside Russia and a continuation of those attacks will likely force an aggressive response from the Kremlin. In our opinion, Ukrainian drone attacks deep inside Russian sovereign territory is a major publicity problem for Putin as Russian propaganda regarding the status of the success of “special operations” will be difficult to spin into a positive with the opposition bringing the battle closer to the Russian capital. Therefore, the potential for Russia to stop or slow gas flows through Ukrainian pipeline should not be discounted in the coming weeks.
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