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Nat Gas Extends Its Rally

NATURAL GAS

Natural gas extended its rally yesterday, climbed above $7.50, and reached the highest level since October 6th. In our opinion, the aggressive rejection of sub $7.00 pricing is potentially a signal that prices below $7.00 are too cheap as we are just entering the northern hemisphere winter! In fact, the trade expects the US to enter the “withdrawal season” with this week’s EIA data and that could be a force prompting short covering of a large net spec and fund short of 120,365 contracts. In another supportive development, an EU executive has solicited for a natural gas/LNG price cap of 275 Euros per million-watt hours. As usual, government officials failed to think out the mechanical implementation of their actions, and it is unclear who will subsidize those forced to provide supply at costs above the cap level. If the EU official intends to enforce a gas price limit on Russia, that could result in a total halt of Russian gas shipments through Ukrainian pipelines. This week’s Reuters poll pegs EIA natural gas in storage to decline by 65 bcf to as much as 111 bcf, and a reading in that range should help support prices well above $7.00. Cooler temperatures, talk of a high gas price cap, reversal action on the charts and the potential for power disruptions at Ukrainian gas import facilities give the bull camp the edge today. However, with natural gas forging a low to high 5-day rally of $0.43 and the market recoiling from the probe above $7.50 yesterday, the risk and reward of chasing natural gas with fresh long entry prices is unattractive.

gas burner

CRUDE OIL

Given this week’s initial action we see resistance in January crude oil at $82.36 and support at $75.27 with the bear tilt holding a slight edge from demand fear. In fact, with Chinese daily infections approaching 30,000, global interest rates ratcheting higher and growing doubt of the effectiveness of a Russian price Cap, the bear camp has several bearish arguments. However, API crude oil stocks posted a much larger than expected decline of 4.8 million barrels yesterday and many traders think the hard November washout has effectively priced in a moderate reduction in global demand. Countervailing the bullish API crude stocks decline is a 2.7% rise in weekly ARA crude oil in storage. In our opinion, the upcoming changes to the Russian embargo will be negative to crude oil prices, with traders pointing out a softening of technical restrictions for companies shipping Russian supply and expectations that a price Cap will be high enough for Russia to finance the war going forward. In fact, this morning reports are the EU is considering a price cap of $65.00 to $70.00 and while that is significantly lower than current prices, many view that as profitable for Russia. On the other hand, the United States Oil Fund ETF has seen very significant inflows this week, with inflows yesterday surpassing $100 million! This week’s Reuters poll projects crude oil stocks to decline by 1.1 million barrels later today, with the crude oil market the only major petroleum market component holding a year over year surplus (2.3 million barrels). On the other hand, US crude oil stocks are 20 million barrels below their 5-year average at this time of the year, signaling relative tightness of supply remains. Furthermore, the last of US Strategic Petroleum Reserve sales are dwindling into the market and will soon stop altogether. While reports that China is slowing its purchases of Russian crude oil ahead of the looming global price Cap, we suspect they are using the impending action to solicit bigger discounts on Russian oil imports. After the close, the API survey said that US crude oil stocks had a weekly decline of 4.8 million barrels which was a much larger decline than trade forecasts. In conclusion, the aggressive rejection of $75.00 hints at a value zone on the charts but we can’t rule out a return to $75.00 if risk-off sentiment returns to commodity markets.

 

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