Written Commentary
NATURAL GAS
At this week’s low the natural gas market likely registered its most oversold condition since last June, but the bear camp has yet to be confronted with a significant reversal in the fundamental drivers. However, European temperatures have turned colder, and we are in the middle of what is typically the coldest part of the year. The market yesterday seemed to ignore a delay in the restart of the Freeport LNG export facility that could allow US supplies to “build, or not decline as much as usual” during the second half of January. Yesterday’s EIA storage report showed an injection of 11 bcf last week, with total storage at 2,902 bcf or 1.4% below the 5-year average. Prices held up in the face of the surprising injection, but an increase in January is rare and should be considered bearish. Yet another negative takeaway from the report was the significant narrowing of the deficit to 5-year average levels. Perhaps the market has exhausted itself on the downside, and perhaps prices below $3.50 are deemed too cheap for the middle of January. However, unless US and European temperatures drop below normal soon, the prospect of major supply shortages this winter will dissipate and probably thicken overhead fundamental resistance.
CRUDE OIL
December Chinese crude oil imports came in above November and year-ago levels, which helped soothe demand concerns. A portion of the runup in petroleum prices yesterday was justified by the favorable news on inflation in the US, which also sparked a sharp decline in the dollar. The recent rally in crude started from talk of a Fed pivot, and that view was enhanced yesterday by a Fed member indicating that the next FOMC meeting should result in a more normal rate hike of 25 basis points. The petroleum markets also appear to be embracing the prospect of developing tightness in diesel fuel, jet fuel, and, to a lesser degree, gasoline. The winter storm likely hindered US refinery capacity utilization, but the reduction in output might be less significant than some believe. Another potentially supportive news this week was the report that the embargo efforts against Russia could be costing that nation $173 million per day, which would seriously reduce their capacity to wage war. The bulls seem to be pricing in a surge in Chinese energy consumption for the upcoming holiday. Those views are given added credence by the latest Bloomberg Road Traffic Index (based on 15 cities in China) that showed continued expansion. Similar traffic activity increases have been posted in North America and Europe as well.
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