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Petroleum Extends Upside Breakouts

CRUDE OIL

The entire petroleum complex has extended upside breakouts this morning off a combination of less outside market drags from the dollar and US interest rates, rumors of a reopening of Chinese air travel, and from a G7 an agreement to set a fixed price for Russian oil. Underneath the surface we think looming shortages of energy products have also sparked speculative buying and perhaps inflation-based hedge buying. In fact, non-financial news coverage yesterday touted the potential to run out of diesel fuel in the US in the next 25 days! A testament to the importance of the diesel situation to crude oil is partially confirmed by very strong crack margins. Furthermore, overnight Bloomberg reports pegged Chinese diesel stocks at the lowest level in 2 years. In the end, we doubt the Russian price Cap will be effective in punishing Russia or reducing their financial capacity to wage war, but the Russians have promised to shut off all energy exports following a cap. However, reports earlier this week pegged Russian October output remaining below their OPEC+ quota and the threat of 2 – 3 million barrels per day of lost Russian supply cannot be discounted. Another positive fundamental development discounted yesterday came from a 21% jump in South Korean oil purchases from the US which in turn resulted in South Korea being the number one buyer of US oil in September.

sunset oil pump

NATURAL GAS

All things considered, the action in the natural gas market this week was surprisingly calm considering bearish demand developments, a healthy injection into US working gas storage, a sharp rally in the dollar and consistent Russian gas flows through Ukraine. However, the bull camp is very fortunate that lost demand from much above normal temperatures in Europe (which could have resulted in a late season jump in European strategic supply in storage), but extremely hot temperatures has sparked late season cooling demand! The weekly natural gas storage report showed an injection of 107 bcf. Total storage stands at 3,501 bcf or 3.7% below the 5-year average. Over the last four weeks, natural gas storage has increased 395 bcf. Despite lower action yesterday, the natural gas market held up impressively in the face of a triple digit weekly US inventory injection and held up in the face of a narrowing of the inventory deficit to 5-year average storage levels. However, a “deficit” of 3.7% versus 5-year average stock levels should result in a minimally tight US supply level at the start of the heating season.

 

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