Nat Gas Sees Semi-Double Bottom
The natural gas market had a semi-double bottom yesterday forged on a rapidly expanding net spec and fund short (natural gas into the low yesterday was trading $0.46 below the level where the COT report pegged the speculative net short at 121,701 contracts). With the International energy agency this morning predicting European gas storage levels might not achieve capacity volumes ahead of the winter and suggesting storages could be as much as 25% to 30% below capacity revitalizes fears of extreme winter tightness. As in many other physical commodities markets, the natural gas market has seen support/lift from a vast improvement in macroeconomic psychology and from a precipitous slide in the US dollar. At present, a tropical depression tracking just east of Venezuela has yet to organize and is likely to dissipate as the system encounters landfall. A supportive development from the supply-side yesterday came from news that Nord Stream has delayed its inspection of the damaged pipelines because of government regulations. We are very skeptical of the bull case with the bounce off the Monday low likely the result of a sudden shift into a risk on market environment. The risk on vibe is thought to be the result of expectations of slower US rate hikes after the November jumbo hike. Internally, with a net spec and fund short near the largest level of the pandemic and Russian actions unpredictable, the risk of implementing shorts in natural gas at current levels could be extreme.
With today’s analysis posted before the OPEC+ official statement, our bullish views might be tested later-on. Internal bullish fundamentals of a larger than expected decline in API crude oil stocks, strengthening fuel spreads, further details from the US treasury on a Russian price Cap, improved energy demand views (largely from surging US equities) and upside chart momentum should cushion prices following a smaller than expected production cut but would add significantly to recent gains if fresh rumors are confirmed. A negative overnight development is a week over week rise in European crude oil in storage of 2.1% and expectations for a decline in this week’s EIA refinery activity reading. With India recently the 2nd largest importer of Russian crude oil (after China), compliance with a G7, US or EU embargo is unlikely to be universally respected. Unfortunately for the bull camp the US refinery operating rate is expected to fall as seasonal action slows refinery activity at least into the 3rd week of October. After the close, the API survey said that US crude oil stock had a weekly decline of 1.770 million barrels which was in sharp contrast to trade forecasts for a moderate weekly increase. With the upside breakout yesterday in November crude oil, near term targeting is a downtrend channel resistance line drawn from the June and August highs at $89.55 today.
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