Written Commentary
CRUDE OIL
We continue to be surprised with residual strength in crude oil prices off expectations that OPEC plus production restraint will ultimately serve to “tighten” global supply. It should be noted that OPEC plus will have a policy meeting next week but at present no changes to current policy are expected by the trade. Furthermore, we expect the markets will continue to see Russian and Ukrainian drone strikes against energy infrastructure which clearly escalates the threat to global supply. In fact, with a Turkish pipeline remaining off-line, a slight deterioration in energy demand expectations has been discounted early this week. In addition to the Russian instructions to their oil sector to reduce output, we suspect yesterday’s gains were large enough to prompt short covering and/or stop loss buying by those pressuring the market over the last week. It should also be noted that Ukraine and Russia have clearly stepped up targeting of energy infrastructure which increases the prospect of a disruption of Russian oil exports.
PRODUCT MARKET FUNDAMENTALS:
With the four-day high yesterday, the gasoline market continues to see lift from the threat against Russian gasoline supply from Ukraine drone attacks. While the gasoline market managed to rise along with crude oil prices yesterday, the market has lost some relative momentum perhaps because of a mini seasonal downturn in US implied gasoline demand. We attribute part of the loss of bullish momentum in gasoline to the prospect of large increases in EIA weekly gasoline inventories following the massive five-week jump in the US refinery operating rate of 17.5%. Unfortunately for the bull camp, the net spec and fund long in gasoline remains overdone potentially robbing the market of buying fuel and/or potentially accelerating stop loss selling on the violation of key charts support levels. On the other hand, the May gasoline contract has built consolidation low support around the $2.70 level and without a broad-based risk off environment, we see the May gasoline contract respecting that level. This week’s Reuters poll projects EIA gasoline inventories to decline by 1.8 million barrels. With the diesel market barely managing to hold in positive territory yesterday in the face of strong gains in crude oil and a modest gain in gasoline, it continues to be the weakest link in the petroleum complex.
NATURAL GAS
Despite news overnight that US heating degree days will remain 8 degrees below normal into the first week of April, gas prices have managed to trade in positive territory early today. Furthermore, floating LNG supply fell 5.3% on a week over week basis and this week’s Reuters poll projects a moderate withdrawal despite the surprise injection last week and that provides additional fundamental support for prices. This week’s Reuters poll projects EIA natural gas in working storage to decline by 24 to 34 BCF. Certainly, the gas market found fresh support from a Russian missile attack of a Ukrainian gas storage facility, but that potential bullish force was mitigated by ongoing steady Russian gas flow transiting the Ukraine state pipeline. In fact, nominations for today are only minimally below yesterday.
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