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Fresh Downside Extension in Crude Oil

CRUDE OIL

The crude oil market is beginning a fresh downside extension. Clearly, energy demand destruction fears are front and center and are becoming “louder”. In fact, the Biden visit to Saudi Arabia to press for increased supply might be successful but not as a favor to the US. In other words, the potential for global energy demand destruction has gotten the attention of the Saudis before and they have interest in avoiding deep recession.

With larger than expected EIA inventory builds in the 3 major product markets yesterday, the second lowest implied gasoline demand reading since February 2021 and the lowest implied distillate demand reading since July 2021, weekly EIA reports confirm a bearish shift in classic supply and demand fundamentals for US products. Certainly, gasoline prices are significantly oversold and could recover sharply from a long list of potential supply-side surprises, but seasonal gasoline demand is declining, the annual gasoline stock deficit has been cut in half over the last 4 weeks and the odds of recession fear are generating ongoing demand destruction selling.

NATURAL GAS

Buying support for natural gas this week has been fueled by European speculation that Russia’s Gazprom might not restart the Nord Steam 1 pipeline after maintenance is completed next week. Overnight fear that Russia may not restart the pipeline was seen from comments from Russia suggesting the future flow in the pipeline will depend on gas demand and “sanctions”! Flow from the Nord Stream 1 pipeline maintenance/repair situation is also dependent on receiving and installing a key turbine from Canada, and therefore it is possible the 11-day maintenance window could become longer. Other likely temporary support for prices came from reports of record Australian LNG exports and from projections that Hungary will attempt to buy 700 million cubic meters of gas for the coming winter.

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