More Downside Selling Pressure

CRUDE OIL

Obviously, the sharp washout in crude oil prices yesterday morning was a reaction to the potential for a return of high anxiety in financial markets. In today’s action the energy markets might see additional downside selling pressure from anxiety of recession prompted by aggressive Fed policy action fears if US inflation fails to show moderation! In conclusion, risk off sentiment, economic slowing fears outside of China and potential renewed fears of jumbo rate hikes ahead suggest outside market forces will prompt lower low action on the charts. In a fresh negative supply orientated development overnight, several key US production areas overnight (Bakken, Eagle Ford, and Permian) showed output next month will likely rise sharply to levels commensurate with the highs last April and in the case of the Permian output the forecast expects the highest output ever. Even international supply news overnight favors the bear camp with Indian refiners sharply increasing their purchases of Russian oil from the Russian Pacific coast. The Russian flows to India are reportedly up to 3.33 million barrels per day. Therefore, the Russian intention to reduce output by 500,000 barrels per day this month is all but discounted for now. Lastly, option skews continue to point to more declines ahead, primarily because of the economic slowing threat from a US financial sector contagion. Fortunately for the bull camp, supply fundamentals improved yesterday following reports of a 9% week over week decline in global floating crude oil supply. Furthermore, the bulls are not without other supportive arguments with a New Zealand bank analyst earlier this week predicting a strong recovery in Chinese energy demand ahead. In yet another potential longer-term supportive technical development, analysis of money managers positioning a Bloomberg story suggests bull positions outnumber bearish positions by the most significant level since before the pandemic.

NATURAL GAS

From a technical perspective, the new low for the move yesterday, respect of $2.50 consolidation support yesterday and the ability to bounce aggressively from that level seems to highlight a less aggressive bear camp. In other words, current fundamentals remain in favor of the bear camp, but a massive amount of the bearish fundamental case has likely been priced and accepted by the trade potentially requiring “fresh/new” and very bearish fundamental storylines to send prices to new lows. This week’s Reuters poll projects EIA natural gas in storage to decline by 67 to only 49 bcf which should be a very bearish outcome. However, one should not discount the potential of a fresh new major bearish fundamental storyline if the US inflation readings seem to confirm inflation has yet to come under control. The US forecast for the next 5 days predicts the Southwest and Northeast to be normal, the Midwest to be modestly below normal and central and southwest areas to be significantly colder than normal. Furthermore, the intermediate forecast has seen a change in its models from significantly below normal temperatures in all US regions to warmer in the southwest. Looking ahead, the bull camp will need a series of significant withdrawals from EIA storage in the face of normal temperatures (unlikely) to increase the odds of a strong bottom. Therefore, to drawdown US inventories quickly will require a massive jump in US exports just to respect support at $2.50. However, there does not appear to be evidence the US is “capable of” pushing up exports substantially.

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