Written Commentary
NATURAL GAS
Apparently, a slight cooling of the temperature forecast was aggressively embraced by the market yesterday and in turn that resulted in January natural gas reaching the highest level since November 7th. The US is expected to see cool temperatures for the first 2 weeks of December. Keep in mind that the natural gas market is poised to shift from the injection season to the withdrawal season with this week’s report. In fact, this week’s Reuters poll projects EIA natural gas storage to post a withdrawal between 65 BCF and 100 BCF! If last week effectively ended the injection season, US EIA working gas in storage enters the North American winter with a minimal deficit of 0.2% relative to the 5-year average. While the natural gas market should be held back by reports of further Chinese Covid activity restrictions, and because of reports that China has sold previously purchased supply back into the market for significant profits the technical picture is positive. In a positive overnight development LNG on floating supply declined by 3.5% on a week over week basis. With the January natural gas contract spiking up sharply to start the trading week, it is likely that a portion of the net spec and fund short of 120,365 contracts was stopped out with the trade above $7.00. While we think natural gas is undervalued below $7.00, we are not inclined to chase the market with buy orders after yesterday’s sharp breakout.
CRUDE OIL
In addition to an oversold condition from massive declines in the prior 4 trading sessions, the crude oil market is likely deriving some short covering buying lift from news that China is reportedly slowing its purchases of Russian crude oil into the oil price Cap expected to be implemented in the first week of December. However, the sharp rejection of the $75.00 level in January crude oil yesterday was likely orchestrated by talk that Saudi Arabia and/or OPEC+ members were not considering an output hike to cushion demand against recession. Not surprisingly, Saudi officials discounted the rumors as false. Even though the Chinese government continues to put a positive spin on Covid rules, the trade no longer sees the Chinese energy demand situation in a positive light. Along those lines, Chinese imports of Russian oil last month reportedly jumped by 16% over year ago levels which means “locked in supply” continues to move onto the world market. In a positive technical observation, the January crude oil contract yesterday managed a significant recovery bounce yesterday morning of $5.00 and that could discourage some fresh sellers today. While supportive of diesel, news that European refinery intake in October declined by 2.6% from September and was 0.5% below year ago intake levels that news should serve to pressure crude oil prices. This week’s Reuters poll pegs US crude oil stocks to decline by 2.2 million barrels, which could result in EIA crude oil stocks falling back below year ago levels. In the coming session, the bear camp should retain the edge as Chinese demand destruction from expanding Covid restrictions is difficult to discount and infections are unlikely to suddenly fall off. From a technical perspective, the crude oil markets capacity to reject a test of $75.00 in crude oil futures yesterday combined with a “mostly sold-out” COT spec positioning gives the $75.00 level credibility as a support zone.
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