Much Larger API Crude Stocks Inflow
While we leave the edge with the bull camp this morning because of an extension of risk on from hope of a tempering of US Fed hawkishness, the upside is limited by a much larger than anticipated API crude oil stocks inflow of 4.5 million barrels yesterday afternoon and by reports of fresh lockdowns in China. However, seeing US treasury yields and the dollar decline sharply adds to the demand supportive environment for most commodities. Crude oil is also supported this morning by indications that the dip in prices earlier this week saw an increase in bargain-hunting buying. Tempering the upward bias is the escalation of US/Chinese tensions which will likely see China continue to buy significant amounts of discounted Russian oil. In a minor negative supply development, Russia’s largest oil producing company on Tuesday offered fresh oil for November delivery which some analysts suggest is a sign of that Russian production is recovering from the exit of multinational oil companies. Into the open this morning, crude oil is probably deriving support from a significant decline in API gasoline stocks yesterday and from tightness surfacing in the New York wholesale gasoline market. The latest Reuters poll projected EIA crude oil stocks to increase 1 million barrels this week and projected an increase in the refinery operating rate of 0.3%. After the close, the API survey said that US crude oil stocks had a weekly increase of 4.52 million barrels which was a much larger build than trade forecasts. Going forward, macroeconomic developments in the US are likely to become increasingly important to the bull case as the trade seems to have transitioned into a posture where soft US data is a positive for stocks and physical commodities.
While we see the rally in natural gas prices yesterday as a bounce in a bear market environment, a reduction in European wind power generation and a 4.5% decline in Chinese gas output for September gives the bull camp fresh fodder. However, more countries are reporting their strategic storage levels are nearing target levels and the latest reports indicate that Russian gas flow through Ukrainian pipeline remains steady. It is also likely that the bull camp is benefiting from short covering from a large oversold net spec and fund short position. However, looking ahead estimates for this week’s EIA storage injection have declined significantly from the prior 5 weeks and that should support prices off the idea that demand has eaten some stocks. This week’s Reuters poll projects EIA gas in working storage to increase by only 56 BCF to 82 BCF, and that could be seen as a sign of a nearing end to the injection season. Furthermore, reports yesterday highlighted the ongoing push for an EU natural gas price limit for Russian supply and that could result in Putin shutting down flows through the Ukrainian pipeline. Surprisingly, the futures rally yesterday was not undermined by extreme weakness in natural gas prices in portions of Texas.
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