CRUDE OIL
The action in the crude oil market yesterday was very impressive and indicative of bullish psychology returning to the marketplace. While prices were already recovering ahead of yesterday’s EIA report, prices accelerated on the upside despite the EIA report coming in extremely bearish in many respects. This morning several positive developments from yesterday have provided the basis for today’s strength with OPEC crude oil output down 500,000 barrels per day in May, the formation of a tropical storm in the Atlantic and signs that gasoline and jet fuel demand in the US are expanding. While prices have recovered from recent lows, they remain low enough to increase talk of adding production cuts at the OPEC+ meeting. However, weekly EIA crude oil stocks readings were bearish, the outlook for Chinese energy demand was not markedly improved by favorable private Chinese PMI data and the weekly EIA implied gasoline demand reading of 9.09 million barrels per day is somewhat disappointing as demand should be improving consistently within the active summer driving season. However, with EIA gasoline stocks holding a 2.9-million-barrel deficit to year-ago levels, foreign car companies reporting significant US sales gains over year ago levels and extending weakness in the dollar, there are reasons to think an intermediate bottom is in place. Unless there is a surprise from OPEC+ in their June 4th meeting (as predicted by Saudi officials), the trade does not expect the cartel to cut production further. In our opinion, OPEC+ production cuts to date have not been a major financial hit to the countries involved as most countries could not produce at the restricted levels agreed to. Going forward, crude oil will be sensitive to US economic data later today as the monthly jobs data could send a wave of volatility through the US dollar and could set the macroeconomic tone for 10 days.
NATURAL GAS
Not surprisingly, natural gas prices yesterday posted new contract lows and extended prices well below 2 1/2-year lows. Obviously, a major catalyst behind the downside breakout/failure was a larger than expected weekly EIA injection which was 10 BCF or 11% above most expectations. With US heat isolated to the Pacific Northwest and portions of the northern Midwest and the midsection of the country expected to see below average temperatures next week the US demand outlook should add to downside pressure. Also sitting on the back of the market is a slight decline in US LNG exports from record levels and evidence that Chinese buyers appear to be looking for even lower prices ahead. With a multiyear downside breakout yesterday justified by a wide array of bearish supply and demand developments there is little to stop the market from posting further declines. We do not have price projections given the lack of credible prices near the market but expect the Bears to maintain control.
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