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Lower Highs & Lows for Crude

CRUDE OIL

A pattern of lower highs and lower lows has extended today with energy demand fears the primary driving force in the trade. In fact, Reuters overnight carried a story from the Middle East indicating that benchmark prices there declined by a dollar overnight because of softening Asian demand. However, pressure from the supply side of the equation is also present today following EIA forecasts of an increase in US Bakken oil production in November to the highest level since December 2020. While a definitive “risk on” vibe and a sharply lower US dollar yesterday justified the strong initial start to the trading week, the market faded in a clear signal that energy demand destruction will not be tempered by higher equity market action. This week’s Reuters poll projects EIA crude oil stocks to increase by 1.6 million barrels which follows a very large injection last week of almost 10 million barrels! Furthermore, US crude oil stocks are at a 12-million-barrel surplus to year ago levels and could remain elevated given the very high value of the US dollar. Overall, we suspect demand destruction fears will be the dominating force this week as China has reportedly stepped-up testing in major cities which in turn should raise infection numbers.

oil field sunset

NATURAL GAS

With a gap lower spike down move to the lowest level since early July yesterday, the natural gas trade continues to remove premium injected by fear of ultra-tight European winter supplies. Furthermore, according to Reuters “dozens of ships carrying LNG” are circling off the coasts of Spain unable to find space for unloading and there are other reports suggesting more than 35 LNG vessels are drifting off Spain and in the Mediterranean! On the other hand, mild US and European temperatures allow for ongoing building of storage with European officials indicating they are approaching their desired capacity targeting. In a “one off” negative, the Russian national gas company posted an increase in gas exports of 2.1% this month compared to the first half of September. This week’s Reuters poll projects EIA gas in working storage to increase by 95 BCF to 108 BCF. Fresh technical damage, bearish weather, and reports of European storage near capacity target levels gives the bear camp the edge to start this week.

 

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