Written Commentary
CRUDE OIL
The path of least resistance remains down in crude oil prices with January crude oil this morning sitting just above this week’s lows in the early trade. While action in the US dollar following today’s US PPI report could result in a resumption of the downtrend in the dollar, without significant weakness in the dollar the bear case could be difficult to overcome. With this week’s slide in crude oil of $11.60, the net spec and fund long in crude oil is probably nearing the lowest levels since September 2016, and therefore the market is obviously oversold. In retrospect, the inability to see crude oil prices rally yesterday in the wake of news of a 10-month high in Chinese crude oil imports highlights the market’s awareness that global refiners are attempting to rebuild tight product supplies. However, overnight reports that Chinese refiners have reduced their run rates suggest the Chinese think international demand for products is softening. On the other hand, millions of barrels of oil are stuck in the Bosporus shipping Strait because of sanctions inspired insurance issues. At this point, a soft US PPI result and a sharp decline in the dollar might offer little speculative long interest today. In another sign of bearish psychology, China reportedly purchased Russian crude at a multi-month low discount which in turn ignores the Russian price cap sanction. Even the supply-side of the equation is bearish to prices with the EIA this week pegging US production at 12.2 million barrels per day which matches the August 5th peak which in turn was the highest since April 2020! Therefore, even with significant refinery demand for physical crude, the market is currently discounting supply threats and are not fully embracing views that Chinese demand will begin to recover.
NATURAL GAS
As in several market views today, we think a moderate portion of the gains this week in natural gas have been short covering/profit-taking/position squaring ahead of key financial data. However, strengthening European spot power prices yesterday and less wind generating power has resulted in power demand for gas jumping in what we think is the first true cold-weather reaction in prices. Weekly EIA gas stocks are 21 BCF below year ago levels and sit significantly below 10-year average storage levels. On the other hand, EIA working gas in storage looks to be entrenched in the downward seasonal slope in supply which normally extends into the beginning of March. The natural gas market is also significantly oversold with bearish sentiment reaching the highest level since the beginning of the pandemic. Without a definitive extension of cold weather in Europe or a shift to colder US temperatures across a wider section of the continental US, the rally in natural gas prices is suspect.
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