Written Commentary
NATURAL GAS
The fundamental path of least resistance remains down in natural gas but the extremely oversold technical condition into yesterday’s low and a slight improvement in demand forecasts from record flow to export facilities justifies some limited gains. However, the stronger demand evidence from increased export activity does not fully offset ongoing mild US temperatures and therefore today’s weekly inventory report is likely to post a smallish withdrawal. This week’s Reuters poll projects EIA working gas in storage to decline by 44 BCF to 77 bcf which compared to seasonal patterns is generally considered a sign of soft demand. Surprisingly, prices are not seeing early lift from a blast of cold air in China. In fact, Asian LNG prices declined overnight following reports that Japanese and Chinese buyers are not looking for supply. In the end, the natural gas market continues to face a wall of bearish conditions with mild temperature forecasts extended again and expectations for a small withdrawal from EIA working gas in storage leaving the bear camp very confident.
CRUDE OIL
The initial gains in February crude oil prices today are likely the result of a combination of an extension of macroeconomic euphoria, sharp declines in the dollar, a moderate dip in US treasury yields and a measure of technical short covering following yesterday’s spike trade reversal near $67.50. However, yesterday’s drop in EIA crude oil inventories puts the market in a stronger position to benefit from improving demand prospects which have been weighing heavily on prices this month. Unfortunately for the bull camp, OPEC predictions of a global supply deficit in the next quarter are partially discounted as cheerleading, with OPEC losing credibility following the lack of aggressive action from last week’s OPEC+ meeting. On the other hand, the short covering/temporary fundamental rally this morning should be restrained by the IEA fourth quarter demand growth reduction of 400,000 barrels per day. With the petroleum markets rejecting lower lows yesterday, a contraction in EIA crude stocks of 4.2 million barrels, and the year-over-year EIA crude oil inventory surplus nearly cut in half from last week, the bull camp does has several bullish arguments today. The markets were also supported following favorable implied gasoline and distillate demand readings from the EIA, with the implied gasoline demand reading the highest since the second week of November. Furthermore, both implied gasoline and distillate demand readings are running above year ago levels which certainly tamps down the threat of sagging energy demand. While the petroleum markets will see support from improvement in the US economic condition today, the magnitude of dollar weakness flowing from soft US inflation readings yesterday has failed so far to create definitive risk on euphoria for energies.
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