Like Petroleum Markets, Nat Gas Has Shifted Into a Downtrend

CRUDE OIL

In retrospect, it appears that the energy market has overly factored in a series of bullish forces and now bullish sentiment looks to dissipate. Obviously, hope for US Chinese trade talk progress, generally positive sentiment flowing from equities and this week’s early upside breakout extension in crude prices provided the bull camp temporary confidence, but that confidence waned with the high to low reversal this week of $3.36. In fact, we see the tide/trend fully shifting in favor of the bear camp, with looming increased supply from OPEC+, ongoing prospects of an Iranian nuclear deal and a higher global supply growth forecast from the International Energy agency. In fact, the IEA increased their 2025 global supply “growth” forecast by 380,000 barrels per day while adjusting demand forecasts upward by only 20,000 barrels per day. In addition to the OPEC+ production recovery US and Canadian oil production are expected to grow this year. In the end, the IEA projects a global supply surplus next year and that discourages would-be buyers. It is also likely that improved relations between the US and Qatar (which includes significant economic diversification projects for Qatar) will ultimately lead to more oil flow. While a US Chinese trade deal will be as difficult to achieve as an Iranian nuclear deal, a nuke deal would allow Iran to increase output by a potential 400,000 barrels per day. However, the most recent EIA report showed year-over-year deficit supply readings in every key crude and product inventory category which should serve to discourage some sellers. On the other hand, EIA crude oil inventories did increase this week while implied gasoline demand was below last year in each of the last two weekly reports. In a more disturbing short-term bearish development, US crude oil exports continue to drop with average US exports down 10% to 3.76 million barrels per day in the four weeks ending May 9^th. Therefore, the surprise reduction in US oil production is partially negated by lower supply leaving the US. In conclusion, both supply and demand factors favor the bear camp and yesterday’s downside probe is likely to be repeated today and next week.

PRODUCT MARKETS

Like the crude oil market, the gasoline market appears to have overpriced bullish fundamentals that may not come to fruition. Furthermore, despite predictions of record summer driving by AAA, the US refinery operating rate is following seasonal patterns with 4 straight weekly gains and a seasonal top in refinery activity not expected until July. While implied gasoline demand showed significant strength in the middle of April with two readings above last year and above five-year average levels, demand has softened and could be pinched in upcoming reports by the May bounce in pump prices.

NATURAL GAS

Like the petroleum markets, natural gas has shifted into a downtrend and has already failed to hold at the first and second retracement levels of the late April and early May rally. Cushioning natural gas against a selling bias is the hope for more supply flow/demand to Malaysia and Indonesia and the prospect of rising northern hemisphere temperatures. However, demand for Norwegian gas in Britain fell off sharply in a sign of softening demand, and the US supply side of the equation favors the bear camp following yesterday’s EIA report which showed a rebuilding of the inventory surplus to five-year average inventory levels to 2.6% which in turn is the highest surplus since the first week of January.

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