Written Commentary
NATURAL GAS
A gap-down trade in natural gas rekindles confidence despite news of a significant jump in US heating degree days last week. Perhaps the washout is a function of last week’s overdone rally which was likely the result of misguided fears of disrupted supply from the Gulf of Mexico hurricane. However, soft European consumption has facilitated softer European gas prices which in turn should throw gas futures prices back to the recent low. In a bearish longer-term development Russia and China continue to push aggressively forward on long-term supply delivery systems which would rob the global gas market of demand. At this point, a potential gas worker’s strike in Australia is fully discounted. While the latest positioning report showed a modest net spec and fund short, that short reading is understated given the rally after last week’s positioning report was measured.
CRUDE OIL
The upside extension/gap this morning in September crude oil follows a gap up opening last Friday presenting extremely bullish technical signals for the delivery contract. However, the actively traded October contract made a new high for the move and promptly fell back suggesting the oil market is not without its vulnerabilities. Apparently, the crude oil market is discounting disappointing Chinese scheduled data overnight perhaps because of an interest rate payment by a beleaguered Chinese real estate firm and/or because the trade continues to draft buying interest from evidence of tightening US crude oil supplies. However, seeing US crude oil supplies continue to fall precipitously in the face of strong US production discounts the idea of softening demand. However, it is possible that the oil market continues to see tightening supply and undaunted demand, but international headlines overnight suggest China is building oil inventories amid rising geopolitical tensions. In a mixed overnight development, OPEC output in August increased by only 40,000 barrels per day because of a large 170,000 barrel per day reduction in production by Saudi Arabia more than offsetting a jump in Iranian output. Fortunately for the bull camp, Bloomberg overnight carried a story predicting strong Iranian oil exports will now soften for the rest of this year. Some measure of current optimistic demand expectations has been fomented by fresh hope of a recovery in Chinese demand following an unending series of stimulus efforts. However as indicated already, a portion of current Chinese demand flow is thought to be strategic supply building and not current consumption. Unfortunately for the bull camp, the net spec and fund long positioning in crude oil, (adjusted for the gains since the last report of nearly $5) should leave the net spec and fund long at 10-month highs.
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