Written Commentary
CRUDE OIL
In retrospect, we think the current washout in energy prices is part of a classic “buy the rumor, sell the fact” reaction to the Russian price cap. In fact, with Pakistan and India indicating they would continue to buy deeply discounted Russian crude oil and evidence that India purchased over 50% of Russian seaborne crude oil flow in November, it is clear the embargo and the price cap are not and will not impede Russian supply flow to the world. Evidence of Russian oil flowing to the world market also came from Russian January to November production gains of about 2.2% on a year over year basis. However, the Russian Deputy Prime Minister overnight indicated they may reduce their crude oil production reportedly because of expectations of near-term price volatility, but more likely the commentary is a threat to retaliate against the price cap. From a shorter-term perspective, seeing contango pricing surface indicates tight supply is moderating. Furthermore, the inability to rally crude oil prices off the prospect of unwinding more Chinese Covid activity restrictions tomorrow, highlights a lack of bullish sentiment. Similarly, seeing global petroleum prices falling aggressively yesterday in the face of Chinese loosening of activity restrictions in two major cities earlier this week highlights a trade embracing the negatives and discounting the positives. In fact, CNBC’s Brian Sullivan indicated that an opening of China could boost global energy demand by two million barrels per day, and therefore the failure to rally yesterday should be a major blow to the bull camp. Even more discouraging to the bull camp is news that Nigerian output is falling, and they will be unable to meet their OPEC quota because producers are not sending product into pipelines and that has failed to provide price support.
NATURAL GAS
Apparently, bearish sentiment toward natural gas remains very broad and fresh sellers continue to pile into the market. However, with January natural gas prices falling $1.72 from the last COT positioning report mark off, the net spec and fund short is likely nearing the largest level of the pandemic era. While the market fell 10% yesterday off mild weather conditions, Arctic cold is expected across the UK, portions of France and in northwest Europe and that should temper fresh selling interest. On the other hand, press reports yesterday indicated the UK would need near record cold temps through the end of the year just to avoid posting the warmest year on record. In our opinion, news last week of the delayed reopening of the Freeport export facility has served to exaggerate the slide of the past four sessions. In the end, natural gas looks to continue to fail at critical chart support points. Furthermore, natural gas has forged the current washout on the highest trading volume since November 23rd.
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