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Nat Gas Vulnerable To More Declines

NATURAL GAS

We continue to see the natural gas market vulnerable to more declines with temperatures in North America, China and Europe allowing both areas to expand supply in reserve before heating demand results in a net discharge of storage supplies. In fact, reports overnight indicate that mild temperature has already saved the UK government more than 260 million pounds in energy price support payments. On the other hand, much above normal temperatures in the EU ahead could result in a surprise late season jump in gas consumption for cooling. Historically the US heating season begins in the 2nd week of November, and that coincides with the beginning of a seasonal downward pattern in EIA working gas in storage. Even though the trade expects a moderately large injection later today in the weekly EIA report, the odds favor the US ending the injection season with a deficit to 5-year average inventory levels. However, without a ramping up of US exports, with the restart of a Freeport facility, US inventories should not decline quickly in the weeks ahead. It should be noted that some US gas export flow has been reduced by maintenance. We see the market vulnerable with significant threats against supply becoming somewhat stale and the industrial demand outlook deteriorating.

CRUDE OIL

While the bull camp was assisted yesterday by several bullish fundamentals in the form of a moderate weekly draw in EIA crude oil stocks, a decline in OPEC oil output in October and by an increase in the US refinery run rate, a broad downshift in global economic sentiment should serve to thicken resistance at $90.00 in December crude oil. Furthermore, an upward explosion in the dollar creates fundamental resistance for WTI crude for export and China overnight left private firm annual crude oil import quotas “unchanged” in a sign of anemic domestic oil demand. The bear camp should be emboldened following a report of record oil output from Alberta in September. On the other hand, Venezuelan oil production declined in October, and German January through August oil imports were up 11%. Obviously, the energy trade is deriving support from anticipation of an aggressive Russian reaction to the price cap scheme, but the official start of the price Cap is more than a month off and support for that Cap is waning. The market is also garnering support from evidence of increased speculative long interest in WTI call trading volume over the last several sessions. In another minor supportive development, the Iranian supreme leader has indicated Iran still plans to “avenge” the killing of a top Iranian general and therefore activity in the waters around Iran should be monitored for attacks on US assets. While the US equity market fell sharply following the Fed meeting yesterday, crude oil prices held impressively and managed to temporarily regain $90.00. Going forward, macroeconomic sentiment in the form of “risk off” from equity market weakness is likely to thicken overhead resistance.

 

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