Written Commentary
CRUDE OIL
With the crude oil market yesterday showing definitively negative chart action, global macroeconomic sentiment deteriorating again overnight and a significant rally in the dollar, the crude oil market is facing further declines today. In fact, talk of a “hard landing” in Europe should add an additional layer of demand fear selling especially given news that the Chinese National Offshore Oil Corporation has raised production above 500 million tons year-to-date and from renewed fears that a recovery in Chinese energy demand is being pushed further into the future. While unlikely to alter the downward tilt today, a wholesale washout in crude oil, EIA indications US oil demand jumped to the highest level since December and given US crude oil exports last week jumped by 40% over the prior week at 4.5 million barrels per day. Clearly, the crude oil market has lost the bullish resiliency from last week, and we attribute that to the expanding “risk off” environment caused by disappointing Chinese stimulus measures, an avalanche of global central bank rate hikes, an avalanche of global central bank rate hike threats for the future, and lastly from Fed chairman concerns of slowing in US from tightening credit conditions. In short, the bear case is fully embracing softening energy demand prospects despite evidence of surging Chinese traffic congestion readings.
NATURAL GAS
While many hate to see a prediction from an analyst calling for trading range action, the gas market is facing many fundamental forces with mixed conditions. Justification for resistance to hold on the charts came from Edison Electric reports of a 13% decline in US electricity output last week, obviously demand concerns from renewed European recession fears and the prospects of a diverting of US LNG cargoes headed to China. On the other hand, disruptions to Russian gas supply flows to Europe, Russian indications that shipments to Ukraine will be halted when current contracts expire and from (a longer-term perspective) Gazprom has excluded gas shipments to Europe in forward market share projections. Unlike last week’s EIA working gas in storage report, this week’s report injection was not at the low end of the range of expectations. However, the surplus storage to 5-year average storage levels declined again partially offsetting the fact the surplus remains large. The market might derive some support from news that natural gas production index readings declined to 2.1 in the 2nd quarter from 7.4 in the first quarter and from entrenched expectations of hotter than normal US temperatures.
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