Fundamentals Facing Crude Mixed
Fundamentals facing the crude oil market today are mixed with predictions of $100 oil from the International Energy Agency if Russia weaponizes oil countered by the realization that US crude inventories are tracking back toward levels seen 4 years ago. In fact, Citigroup indicated that US strategic petroleum reserve releases have restored US stockpiles to levels commensurate with 2016/2020 seasonal levels. In a fresh negative development overnight the Mexican national oil company posted a 30% gain in September oil exports. This week’s Reuters poll projects EIA crude oil stocks to increase by 300,000 barrels and for the US refinery operating rate to increase by 0.5%. In a longer-term supportive development OPEC raised its long-term oil demand forecast but the cartel indicated the need for renewed investment to meet future demand. While the energy markets were not particularly moved by Russia’s decision to pull out of a United Nations humanitarian agreement on allowing Black Sea shipping that news could result in escalation of embargo and Cap pricing efforts and that in turn could yield fresh Russian supply concerns. The latest EIA monthly report raised its projection of demand for August by 102,000 barrels per day versus their prior estimate. While severe Covid restrictions in China are undermining Chinese energy demand hopes, overnight there are rumors that China might be planning an exit plan from zero covid policies.
We are very skeptical of yesterday’s rally in natural gas prices as weather forecasts show little chance of early cold kicking off the heating season ahead of schedule, Russian gas flows through Ukraine remain consistent and Germany has managed to cut industry consumption by a significant amount (20%). However, natural gas should draft support from news that Russia has backed out of a UN deal that allows critical humanitarian grain shipments to move through the Black Sea. However, despite Russia’s exit of the shipping agreement reports on Monday suggested shipping activity continued despite a change in the Russian official stance. Holding back natural gas prices is a potential delay of restarting the damaged Freeport LNG export unit as regulators have not received all the required information from Freeport for permits to operate. In retrospect, the sharp gains in natural gas yesterday were forged in the face of monthly EIA lower 48 gas production readings which posted a month over month increase of 0.5% in August. It is possible that a looming end to the injection season has prompted a portion of the net spec and fund short to cover positions which could indicate buying will be short-lived. We are highly skeptical of yesterday’s strong start to the trading week with both supply and demand developments yesterday definitively bearish.
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