New High Expected in Crude

CRUDE OIL

While the December crude oil contract this morning has not posted a higher high for the move, bullish demand news, a weaker dollar and generally positive macro sentiment are in place, and therefore, we expect a new high for the move later today. As indicated, the bull camp is bolstered this morning by news of a 9.4% jump in Spanish September crude oil imports and by news that Chinese October crude oil imports jumped reportedly for new refineries. Even the supply-side of the equation benefits the bull camp today with crude oil in floating storage on the week falling 18% with European floating storage down by 32% and US Gulf Coast floating storage declining by 77%. According to the press, the rally last week was attributable to forward progress on a Russian price cap deal. However, rumors that China may relax Covid restrictions with an opening of foreign air travel should serve to spark buying of physical commodities across-the-board. Unfortunately for the bull camp, reports are that the G7 Russian oil price cap will only be implemented on seaborne supply which indicates one hole already in the effort to reduce Russian capacity to fight the war. Not surprisingly, many energy analysts have raised their targeting forecasts and there is an argument over the current Russian oil discount between those predicting $40 under WTI offset by predictions of a 10% discount. While we suspect the rally from the last COT report shifted the net spec and fund short into a net spec and fund long, the low spec long position suggests the market has a massive amount of speculative buying fuel on the sidelines. Last week the Baker Hughes rig “gas and oil” drilling counts expanded for the 3rd straight week and is now 40% above year ago levels. US oil rigs drilling increased by 3 last week to reach their highest level since March 2020. While the rally is likely the result of increased Chinese demand hopes and the potential for a Russian backlash against price caps, apparently that offsets news that supertankers sailing toward the US have reach the highest level in 4 weeks, and sailings to China from the US have declined!

NATURAL GAS

While the winter storm in the Northwest expected to yield temperatures in Western and central US to be 10 to 15F below normal and 2 to 10F below normal in the rest of the country, the trade has seemingly jumped into an early winter demand reaction. However, the upside action should be limited because of ongoing warmer than normal temperatures throughout Europe and from news that German gas stockpiles are now more than 99% full. It should be noted that the official implementation of a Russian price cap is December 5th with some mutiny among European countries already encountered. Over the weekend the Russian national gas company indicated gas flow continued through Ukraine but that is offset by an atypical jump cooling demand in portions of Europe. From a technical perspective, the bear camp has expended significant selling interest and the net spec and fund short is at the largest level of the pandemic which to some indicates overdone negative sentiment. Natural Gas positioning in the Commitments of Traders for the week ending November 1st showed Managed Money traders were net short 75,627 contracts after decreasing their short position by 9,594 contracts. Non-Commercial & Non-Reportable traders are net short 127,126 contracts after net buying 6,723 contracts. In retrospect, the range up breakout in natural gas at the end of last week was surprising as is the magnitude of gap up rally this morning, but the rally might be fundamentally justified by G7 Russian Price Cap efforts which is thought to move the needle toward a complete Russian energy export ban of gas and oil exports. On the other hand, upside action should be limited because temperatures remain well above levels required for early heating in Europe.

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