Written Commentary
CRUDE OIL
The path of least resistance remains up in the crude oil market, but initial action today should be a disappointment to the bull camp. In other words, given the Chinese stimulus (in the form of a bank reserve ratio reduction), fresh record highs in many global equity markets, a weaker dollar and perhaps most importantly an improvement in sentiment toward physical commodities, crude prices should have broken out to the upside. Nonetheless, March crude oil is poised to make fresh new highs for 2024 and could see fresh spec and fund buying with a move above the 200-day moving average at $75.41. In fact, overnight Middle East crude oil grades jumped specifically off hope for improved Chinese demand and that bullish news is compounded by the overall API crude oil stocks decline of 6.67 million barrels last week especially with that news is amplified by a 2-million-barrel decline in stocks at the Cushing Oklahoma hub. However, the large crude oil outflow was heavily countervailed by a massive 7.1-million-barrel inflow to API gasoline inventories. Perhaps the market is being held back by projections that OPEC+ production restraint is unlikely to produce an inventory drawdown in the first half of 2024. On the other hand, oil storage in ARA facilities declined by 16% over week ago figures. If the market can avoid any bearish surprises from today’s EIA report, crude oil prices may be able to hold their ground above both the 50-day and 200-day moving averages for the first time since late October.
NATURAL GAS
From a technical perspective it appears the natural gas market might have temporarily exhausted the downside push with the Monday gap lower opening subsequently rejected and prices early today closing the gap with what could be a second straight day of gains. It is possible that European buying is lifting prices as LNG shipments to Europe are being delayed from the ME with North Sea shipments also capable of being delayed by an approaching storm. However, given the approach of the storms and a recent pattern of strong German wind power generation, natural gas will be fighting an uphill battle. Furthermore, Bloomberg overnight carried a story indicating the European gas options trade has seen implied volatility decline to pre-Russia/Ukraine war levels in a sign that traders have very little concern for a last-minute winter inspired tightening of supply. On the other hand, declining LNG prices in Asia are reportedly nearing levels that could inspire bargain hunting buying. The latest 6-to-10-day forecast has above normal to well above normal temperatures across most of the continental US, and that put pressure on natural gas prices as that will diminish power plant and heating demand over that timeframe. However, US gas production has not returned to early January output levels following last week’s cold temperatures, and that has provided the market with underlying support. LNG exports are also expected to return to near full capacity this week, and that should give a further boost to natural gas prices. A positive key reversal and upside follow-through from filling the chart gap from last Friday should lift prices unless EIA readings spark broad selling in the petroleum markets.
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