Written Commentary
CRUDE OIL
In retrospect, recent weakness resulted from deterioration of demand “expectations” and from forward expectations of expanding supply. However, global and US oil inventories remain tight and Saudi Arabia has indicated they could take further action to keep the energy market balanced. Unfortunately for Saudi Arabia, rumblings yesterday suggested Saudi Arabia and Russia may need to cut production further as struggling members of OPEC incrementally bring back production. According to Bloomberg, the struggling members are known as the “the fragile 5” and include Iran, Iraq, Libya, Nigeria, and Venezuela. Furthermore, overnight headlines tout the return of Venezuelan supply from rundown oil field investment because of talk of lessening sanctions. Similarly, hopes of a revitalization of Iranian production have surfaced because of signs of an impending US/Iranian deal. Earlier this week, the world’s largest crude oil ETF saw the largest outflow since 2020 and without a continued risk on environment, disinvestment in oil could pressure prices next week. A potential surprise volatility generator today could be outside market influences in the wake of today’s US Federal Reserve chairman speech, as the dollar has gapped higher overnight and could curtail exports from the US. While we do not expect a wholesale washout in prices directly ahead, softening seasonal demand patterns and a temporary macroeconomic letdown could throw October crude oil down toward a lower and more significant support level.
NATURAL GAS
While the initial Australian LNG facilities strike threat failed to provide upside action, unions at a Chevron Australian facility are threatening strikes and that should temper bearishness and perhaps provide minimal and temporary short covering. Furthermore, it is possible that the washout yesterday was a temporary capitulation with this week’s injection report giving some pause to the bear camp with a smallish injection. Over the last four weeks, natural gas storage has increased to 96 bcf. It should be noted that in addition to a smaller than expected injection, the surplus versus the five-year average continued to narrow and therefore sellers could be discouraged from attacking it at current levels. It should also be noted that yesterday Texas saw extreme heat and surging cooling demand with hot conditions returning to the US early next week. Furthermore, tropical wave activity in the Atlantic has expanded dramatically which increases the chances of a storm impacting production and/or transportation concerns. However, in our opinion, it will take a major storm to create sufficient supply concerns. We think the market is oversold from both technical and fundamental perspectives. However, we see the market more likely to bounce from technical issues rather than from fundamental justification.
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