Written Commentary
CRUDE OIL
With a fresh extension of the higher high pattern this morning, generally positive global economic sentiment flowing from global equities and hope for a downward extension in the dollar, the bull camp appears to be benefiting from macro-economic signals. It is almost folly to think crude oil prices today will avoid significant outside market volatility influences following the release of the US CPI report. In fact, we see the potential for chain reactions through many financial and commodity markets today. With rumors swirling in the US Wednesday trade of a significant drop in CPI, traders should not discount the potential for a large euphoric rally in crude oil, equities, and other physical commodities. We would also note that many markets (the petroleum markets included) have benefited from recent speculation of a Fed pivot and many markets are sitting moderately above recent lows because of that pivot hope. Forced into a prediction, we see odds of a soft reading higher than a hot reading. While the markets might be too granular in their focus and over-reactionary to the CPI report today, a reading in either direction (not aero) should result in very large price reactions! Obviously crude oil yesterday showed significant bullish resiliency in the wake of the massive 19-million-barrel single week jump in EIA crude oil inventories. However, the trade discounted the large build because the source of the jump has been known for several weeks and is already being corrected. On the other hand, the EIA refinery operating rate “did contract sharply” to 84.1% and that should reduce product flow somewhat and in turn temporarily cushion those markets against slumping demand.
NATURAL GAS
While the spike down new low for the move and reversal yesterday provides an isolated bullish technical factor. We do think that the estimates for this week’s EIA natural gas in storage have factored in weak demand. On the other hand, last week’s withdrawals met the qualifications of a bullish result, but prices declined. With this week’s Reuters poll projecting small and atypical draws the bear camp retains a fundamental edge from the supply angle. While we see natural gas prices less impacted by today’s US CPI report, we still expect a temporary flare in volatility if the CPI report is away from expectations. In a development that is more of a general interest to the market as opposed to a trading factor today, the Russian Ministry of Energy indicated that Russian oil and gas revenues in December totaled $780 million, but that story is countered by other market estimates that Russia might be losing as much as $173 million per day in oil revenues.
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