Written Commentary
NATURAL GAS
We are very surprised that heat in Texas has outweighed cooler temperatures in other portions of the US. In fact, the market is tracking higher again today despite flow to terminals dropping potentially signaling an outage which in turn should back up US supply. Furthermore, stories from Europe indicate strategic storage is at record levels for this time of the year thereby reducing the prospect of heavy concentrations of buying to “top off” supplies just ahead of winter. The EIA raised its US 2023 dry natural gas production forecast this month to 103 BCF/day compared to a previous forecast of only 102.35 BCF/day. The EIA also raised its US 2023 natural gas consumption forecast to 89.3 BCF/day from 89.02 BCF/day. In conclusion, an increase in the EIA supply forecast is only partially offset by a minor increase in demand forecasts. While the charts favor the bull case with the upside breakout extension, finding bullish fundamentals capable of projecting prices consistently higher is difficult at best. A portion of this week’s buying could be from speculation on seasonal pickup in hurricane activity or simply from hot Texas and US East Coast temperatures. On the other hand, US and European supplies appear to be building and are likely to be topped off before winter heating demand materializes.
Burning gas burner. Blue fire with a red flame.
CRUDE OIL
With growing fears of deflationary slowing in China, a 3.1% increase in European crude in storage, a sharp decline in Spanish June crude oil imports and a much larger than expected increase in API crude oil inventories, the upside breakout in the crude oil this morning is very surprising. However, the funds have turned bullish again even though the EIA expects US crude oil output this year to reach a record of 12.76 million barrels per day and despite Iran raising its oil output by 250,000 barrels per day this summer. Obviously, the upside breakout on the charts provides fresh bullish technical fodder as does the strongest WTI spread readings since November. However, it is also possible that the Biden administration plan to dramatically reduce carbon emissions from the electricity sector has rekindled fear that a premature forced shift away from hydrocarbons again will cause another significant shortage. In fact, rig operating counts have continued to decline and according to the EIA that action might already be showing up in reduced US production flows. In retrospect, the ability of crude oil to reject the sharp range down washout yesterday morning is very impressive considering news that Chinese July crude oil imports were at the lowest level since January and given news that the latest EIA US crude oil 2023 output forecast was raised by 850,000 barrels per day from a previous forecast of a rise of only 670,000 barrels per day. Further bearish supply-side news was documented overnight from a Bloomberg article indicating Saudi and Russian oil cutbacks are being offset by a lack of cooperation from other OPEC plus producers
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