Written Commentary
NATURAL GAS
With the EPA releasing stringent tailpipe emission reduction rules for auto manufacturers overnight, the push toward greater reliance on electric vehicles should intensify which in turn will increase demand from the US electric grid. Furthermore, with the US deriving 31% of its power from natural gas and 17% of its power from coal fired utilities, demand for natural gas should continue to expand and in turn that could be a key psychological bottoming anecdotal headline. As expected, US export demand posted a new daily record yesterday, but that supportive development was offset by lower 48 state gas demand posting a decline of 6% versus this week last year. However, US gas flows to export terminals increased by nearly 6% on a week over week basis, and that combined with an improvement in economic expectations could turn up pressure on a very large net spec and fund short positioning. While the reasons to attack natural gas from the short side remain in place, the story has become a bit stale and record daily LNG exports should increase the risk of fresh shorts at historic low levels on the charts.
CRUDE OIL
With a technical breakout in May crude oil to the highest level since January 27th in the early trade today, the energy complex continues to anticipate ongoing improvement in global energy demand. Furthermore, even though May crude oil damaged its charts early in the Tuesday US trade, an aggressive rejection of the sub-$80.00 level erases bearish chart signals. Yesterday, the EIA released their latest Short-Term energy Outlook with expectations of a reduction in world oil demand growth of 44,000 barrels per day leaving a year-over-year increase of 1.44 million barrels per day in place. Unfortunately for the bull camp, the EIA projected US oil production to increase this year to 12.5 million barrels per day versus last month’s forecast. This week’s Reuters poll projects EIA crude oil inventories to decline by 1.3 million barrels which combined with reports of a significant increase in commercial long positioning should leave energy prices with some internal fundamental support into the ultra-critical US CPI report later this morning. The API survey showed that US crude oil stocks rose by only 377,000 barrels which contrasted with trade forecasts calling for a moderate weekly decline. While a bigger negative for the products than crude oil, headlines this week are rife with evidence of Russian diesel exports surging to the Middle East (Iran), Brazil, China, and Europe. The bull camp should garner some support from strength in Middle East oil grades yesterday especially after the largest Middle East oil companies indicated they would supply full volumes to customers in Asia this month.
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