Written Commentary
CRUDE OIL
While global economic fear has subsided following central bank support of a beleaguered Swiss bank, global bank contagion fears remain in place, and it feels like macroeconomic views toward the US and Chinese economies have also deteriorated this week. Therefore, a large portion of the washout in petroleum prices yesterday was the result of surging energy demand fears from deteriorating big picture macroeconomic conditions. However, supply fears early today also favor the bear camp with yesterday’s increase in EIA crude oil inventories joined this morning by Bloomberg news suggestions that Russia is “unlikely” to fully undertake the March oil output reductions which were pegged by Russian officials to be 500,000 barrels per day. On the other hand, Russia has continued to maintain a surprising level of fuel exports and posted a 3.1% week over week increase in gasoline production. In the end, the bear camp retains an edge especially with the International Energy Agency overnight projecting the world oil market has shifted into a surplus condition. From a shorter-term perspective the trade continues to see option selling and various skews projecting further downside price action with the added selling threat reportedly arising from possible crude oil position sales to shore up financial firm capital levels. While EIA crude oil stocks increased, the inflow was as expected, and prices should derive some support from extremely tight US East Coast oil supplies. According to some analysts, the extreme tightness on the East Coast is the result of rising US exports and the difficulty in transporting US crude to the East Coast without violating outdated US shipping laws. It should also be noted that most pipeline systems in the East Coast are “product” pipelines. Left to their own internal fundamentals, crude oil prices have entered a cheap price zone but outside market conditions leave control with the bear camp.
NATURAL GAS
Even though the natural gas market has held up relatively well against growing big picture macroeconomic negatives, bearish action on the charts yesterday, evidence of a slow recovery in China, negative spillover pressure from petroleum markets and fear of a small weekly withdrawal from EIA inventories today favors the bear camp. As indicated yesterday, this winter has produced only 3 “triple digit” weekly withdrawals from US inventories (100 bcf or larger) while the surplus versus recent average levels has virtually exploded. Apparently, the markets are fearful that the US bank contagion has extended to Credit Suisse fears which obviously begins to question global industrial demand for natural gas. It is also possible that ongoing strikes in France at LNG terminals are serving to back up some US supply offshore in Europe and that could slow US exports ahead. The US weather forecast has temperatures potentially running 10 to 15 degrees below normal into the end of the month, but that will not provide support today unless the EIA storage withdrawal is triple digits. The path of least resistance is down with both supply and demand news favoring the bear camp.
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