Higher Action In Crude
Higher action in crude oil this morning in the face of a 24% week over week rise in global crude oil in floating storage is surprising given the aggressive downside action last week. However, the high to low washout in crude oil last week of $7.50 was justified by a very severe downgrade in global economic prospects following signs the US economy is slowing. Perhaps the trade is experiencing limited short covering from last week’s sharp slide with the January crude oil contract crossing up the shorts this morning by regaining the 200-day moving average at $76.20. While there is a debate among analysts and oil market players, there are those who think OPEC+ could announce further production cutbacks which would clearly put a floor under prices. While overnight news suggesting China is buying for reserves could be seen as bullish, we think that signals a lack of need or urgency for domestic product supply. Granted, there are ongoing concerns of a sudden Middle East supply disruption but with the declines of the last four weeks, crude oil prices now have very minimal or no war premium in prices. However, it is possible that prices will see minimal lift from the 12th round of EU sanctions against Russia which require details on cargo transactions with Russia. Furthermore, the US began to police compliance with sanctions regarding prices of tankers carrying Russian oil to the world markets. Apparently, the US has notified 100 shipping companies and has requested information on transactions with the Russians. However, not all will comply with US sanctions and the US will have little recourse against that supply flow. Bullish sentiment in the market is clearly absent with prices failing to react last week to a Bloomberg article suggesting that OPEC+ might consider deepening production cuts the bull camp is not easily revived. Last week, the Baker Hughes oil rig drilling count rose by six which is the largest single week increase since February.
The initial headline focus today is the fact that European storage is at capacity thereby reducing and/or eliminating bargain hunting buying on the continent. In fact, there were also signs overnight that China and other Asian countries were “full up” on winter inventories and that should severely limit bargain hunting buying. While a strong El Nino can result in very heavy snowfall amounts in Europe that does not definitively signal extremely cold temperatures which are needed for the bull camp to gain any respect. With a sharp range down extension into new contract lows last Friday, natural gas prices remain in a downdraft. Periodic fresh record production data from the US, periodic minimal export facility glitches, generally normal to mild northern hemisphere temperatures and fresh fears of US slowing should leave both supply and demand conditions with the bear camp.
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