Written Commentary
CRUDE OIL
With a fresh higher high in crude oil early today, the bulls have retained control despite broadening chatter of demand destruction from high prices. However, unending concern of a Middle East supply disruption, a decline of 2.2 million barrels in API crude oil stocks and escalating bullish speculative sentiment leaves the bull camp in control. Prices were also lifted because of escalating supply disruption fears in the Middle East following the latest Israeli attack reportedly killing 7 aid workers. Also underpinning the bullish bias is the Ukraine drone attack on the third largest Russian refinery. Apparently, the drone attack reached 800 miles from the war front which is certainly concerning for the world oil markets. On the other hand, Russia indicated damage was limited to non-critical areas of the unit. It is also likely that improving views toward the Chinese economy and talk that Saudi Arabia will attempt to lift Arab Light crude sales to Asia by $0.20/$0.30 per barrel is justification to lift global energy demand expectations. As if the bull camp needed added bullish ammunition, Mexico has indicated they will reduce oil exports to the US over the coming months as Mexico attempts to increase domestic refining.
PRODUCT MARKET FUNDAMENTALS
Clearly, the gasoline market has joined the rally in the crude oil market, with a decline in API gasoline inventories yesterday and positive Chinese economic news adding to the bull bias. Granted, improved sentiment toward the Chinese economy helps demand views and an attack of Russia’s third-largest refiner could serve to tighten the global gasoline market. However, the Russian oil minister indicates product supplies in Russia are at very high levels and indicated that the drone attack did not damage critical components at the refinery. Fortunately for the bull camp, this week’s Reuters poll projects EIA gasoline stocks to decline by 2 million barrels as the technical set up in gasoline should be concerning for the bull camp with this week’s sharp rally forged on very low trading volume. On the other hand, open interest in gasoline reached the highest level since February 2022 potentially indicating some fresh longs are entering the market.
NATURAL GAS
We remain highly skeptical of the natural gas gains over the prior three trading sessions especially with the Ukraine state gas transit company confirming a jump in purchases of Russian gas from April 2nd into April 3rd. Certainly, improving views toward the Chinese economy have revived LNG demand hope but with the US market brimming with excess supply we see short covering as the force behind the recovery off last week’s lows and not fresh outright buying. In fact, overnight reports from Asia suggest Japanese buying is slowing with aggressive utility buying last month likely refilling low supplies. A potential major long-term negative to US natural gas prices is word of a large expansion of an international natural gas operation likely made possible by the US administration’s move to restrict future US LNG exports.
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