Written Commentary
NATURAL GAS
Not only were we surprised with yesterday’s aggressive rally, but we are also even more surprised with this morning’s higher high trade. In fact, natural gas is strong despite a weekly jump of 8.5% in global floating LNG supply. However, prices are supported because of signs of active Asian bidding especially with interest from emerging economies present. While we are surprised that European gas in storage is only 59% full, a normal winter drawdown is not surprising. However, the rally in natural gas is very suspicious given lingering US export problems as that can backup onshore US supply especially with US production near record levels. Fortunately for the bull camp, there have been some reductions in US production and talk of improved US demand. Some traders suggested cooler weather was behind the rally Monday, but we suggest Monday’s rally was short covering rather than fresh outright buying. Perhaps demand is expanding because of extremely cheap US pricing but the EIA also thinks US production this year is set to decline for the first time since 2020.
CRUDE OIL
While the new high for the move in crude oil early today is justified by the latest Israeli offensive in Gaza, the trade continues to embrace expectations of improved Chinese energy demand following a recent positive order factory report. Another primary bullish catalyst this morning is a plan by the state Mexican oil company to reduce Mexican oil exports. Another recently surfacing bull theme is noted strength at US oil trading hubs which the trade sees as confirmation of a tightening of domestic supply. Another indirect support for crude oil prices came from the product markets overnight with Russia indicating they will reduce daily diesel exports this month to the lowest in five months. Apparently Ukrainian drone attacks on Russian refineries has had an impact on the country’s oil processing. The crude oil market has ranged sharply higher and managed strong gains in the face of a dramatic rally in the dollar and a surge in US interest rates! Yet another bullish sign of strong demand is seen from India which continues to make significant purchases of Russian oil. Indian crude oil imports from Russia in March reached their highest level since November, but that could also be an attempt by India to build up supply ahead of additional sanctions against Russia.
PRODUCT MARKET FUNDAMENTALS
Clearly, the divergence between crude oil prices (up) and gasoline prices (down) yesterday has ended with May gasoline seemingly poised for an upside breakout alongside an upside breakout in crude oil. Significant gains in crude oil prices could continue to pull gasoline prices higher, especially with this week’s Reuters poll calling for a decline in EIA gasoline stocks despite the persistent jump in the US refinery operating rate since the beginning of February. As in the gasoline market we saw the diesel market vulnerable to potential rising supply in the US from a very high refinery operating rate. However, the bull camp is saved by strength in crude oil, talk of significant purchases of jet fuel for summer travel and from a noted drop in Russian diesel exports.
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