Path of Least Resistance Down for Crude

CRUDE OIL

Even though the crude oil market is holding up in the face of significant market wide risk off psychology, we see the path of least resistance pointing down. Obviously, the expansion of the Covid problem in China is at the root of broad-based negative price action in nearly all physical commodity markets this morning. Adding into the initial downward tilt in crude oil is news that Russian Black Sea oil exports have resumed (after a storm), a significant jump in the dollar this morning and news that crude oil in floating storage increased by 12% over last week. However, the crude oil trade expects strong Chinese crude oil imports ahead as the government seeks to capitalize on the global fuel shortage brought on by the Russian embargo by ramping up domestic refinery activity. Last week the Baker Hughes oil rig drilling report showed an increase of one rig, putting the total rig operating count at 219 rigs and 39% over the same time last year. In the most recent EIA forecast for next year, the “growth” of US output was reduced by 21%. Currently US 2022 daily crude oil production is running at 11.8 million barrels per day which is 500,000 barrels per day above 2021. However, the EIA projected 2023 US production of 12.3 million barrels per day which would reach the old record from 2019! The most recent positioning report showed the net spec and fund long in crude oil at 338,198 contracts which was near the longest levels since mid-July. On the other hand, since the COT report was measured crude oil prices have declined nearly $9 per barrel and that could push the net spec and fund long down to the lowest since September 2016! However, later this week, the trade will likely see minimal improvement in energy demand hopes from the largest US holiday air travel week of the year! Unfortunately for the bull camp the hope for holiday travel demand could be completely overshadowed talk of Putin’s demise begins to surface from credible sources and that in turn sparks peace talks. It should be noted that Ukraine is reporting heavy damage to its energy infrastructure from Russian bombing with some officials worried that the capital could lose all power! At least to start the week, the $80.00 level looks to be a key pivot point potentially holding up as support until the direction of global equities telegraphs overall economic sentiment.

NATURAL GAS

In retrospect, the January natural gas contract has settled within a $7.00 and $6.00 trading range, with the bear camp confident with European storage coffers in good standing and US working gas in storage sitting right on 5-year average levels for this portion of the season. So far, the restart of the Freeport export capacity damaged by fire remains unknown and that in turn continues to “backup” US supply normally in position for export. As of this writing, the Russian national gas company continued to ship gas to Europe via the Ukraine with reports of a slight increase in volume from levels on Saturday! In a longer-term supportive development China apparently inked one of the largest LNG purchases ever with Qatar. This week’s COT positioning report showed natural gas holding a net spec and fund short position of 120,365 contracts which is near the lowest level since the beginning of the pandemic. Last week, the Baker Hughes US gas rig drilling count increased by two with 157 rigs operating. We see mild temperatures throughout Europe through the end of the week pressuring prices with a zone of cold temperatures limited to northern Italy providing very minimal cushion for prices. Furthermore, the January natural gas market finished last week near the upper portion of the last 4 weeks consolidation zone leaving the market vulnerable to a chop down toward consolidation support of $6.13.

Interested in more futures markets?  Explore our Market Dashboards here.