Focus on Debt Ceiling Negotiations

CRUDE OIL

In the days ahead, the energy markets are likely to be hyper focused on demand signals primarily arising from the ebb and flow of the US debt ceiling negotiations. In fact, at times last week, the trade saw broad-based big picture physical commodity market selling despite market buzz of a possible US debt deal. Certainly, the market continues to draft minimal support from headlines touting ongoing OPEC+ production cuts. Over the weekend, the Iraqi oil minister apparently reaffirmed the country’s commitment to the Russian oil minister via telephone that the country would stick to the agreement to discourage oversupply. The Russian president over the weekend indicated oil production cuts need to be enforced to support prices. While the Russian president also indicated his country has been cutting production and was at the agreed-upon level, signs of Russian export from storage has kept India and China well supplied. However, while Chinese apparent demand for April increased by 25% over year ago levels and reached a fresh record at 15.09 million barrels per day, Indian April crude oil imports declined 8.3% versus year ago levels. In the short-term, strong US refinery operating rates are needed to build seasonal fuel supplies to meet rising demand especially with residually tight US inventories. In fact, the need to rebuild inventories is already high amid signs US gasoline demand is running hot early in the season and that should result in solid refinery demand for US crude supplies. However, recent strength in the US dollar is a potential limiting issue for the bull camp. Fortunately for the bull camp the net spec and fund long positioning in crude oil has been moderated with recent downside action and from sideways chop on the charts. As indicated, the market’s focus will likely be on the direction of global demand which in turn will see a huge impact from the ebb and flow of US debt ceiling talks. We suspect the initial bias will be down as US debt ceiling negotiations produce last-ditch position demands from both sides which will likely delay a deal closer to the point where the US runs out of cash.

NATURAL GAS

While the technical trend remains up in natural gas from the extension of the rally and the trade above $2.75, we are concerned with the significant open interest gains in the face of ample supply and ongoing strong production in the US. In fact, the Russian gas oil company confirmed their intentions to continue to ship gas to Europe via the Ukraine and that combined with cool temperatures over the weekend throughout most of the US should erode bullish confidence. However, significant heat returns to the central portion of the United States this week with hot temperatures seen along the southern border and up through Nebraska to the Canadian border. Therefore, demand prospects should help underpin a short-term overbought market. Adding into the potential demand support for natural gas early this week, is the return of hot temperatures in North Africa and central Europe by the end of this week. While the natural gas market is short-term overbought internal demand should support, while big picture global macroeconomic influences could temporarily knock prices down early this week.

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