Written Commentary
NATURAL GAS
With only a minimal rally this morning following news that China has dramatically picked up its pace of LNG buying because of colder temperatures, natural gas continues to show it is not sensitive to bullish developments. However, prices are higher this morning because of recent cold US temperatures but forecasts for US Midwest temperatures into the end of the year are expected to be warmer than normal. We see the reversal from last week’s rally as a sign the bear camp has regained control as recent cold temperatures in the US and China should have provided fundamental support for prices yesterday. However, the bear camp should remain confident given very high US production readings, especially with temperatures in general this month closer to average than below normal.
CRUDE OIL
While we are surprised with the upside extension in petroleum prices today, it appears that Chinese energy demand is better than recently expected with China buying an unusual cargo from Venezuela yesterday and overnight posting increased imports of Russian oil last month. However, as in many other physical and industrial commodities, crude oil is drafting a significant amount of lift from “macro” optimism flowing from unending hope for global rate cuts early next year and from significant “good feelings” flowing from unrelenting gains in US equities. Unfortunately for the bull camp, the API posted a much smaller than expected decline in crude oil stocks of 939,000 barrels, and posted a smaller than expected build in gasoline stocks but that was offset by a much larger than expected increase in distillate stocks. Unfortunately for the bull camp US average retail pump prices continue to plummet indicative of soft current demand but according to economic theory lower prices should eventually help improve demand. Clearly, the energy markets are moving to embrace a slightly improved energy demand outlook, but with a 16.6-million-barrel year-over-year surplus in EIA crude oil inventories, the bulls do not have the backing of supply concerns from the US as was seen in late summer and early fall. Some news outlets suggested buyers were moving into crude because of the fear of a supply disruption from Red Sea terrorist attacks on shipping vessels, but a task force moving into the area including the US Navy will likely prevent any serious supply problems. Obviously, outside market forces remain positive from signs of falling global inflation favor (which favors rate cuts) while internal fundamentals are mixed at best. While strength in US implied gasoline and distillate demand has been good recently, the markets have not fully embraced that demand positive story and therefore today’s implied demand readings are indirectly important to US crude pricing.
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