Written Commentary
CRUDE OIL
Clearly, the petroleum markets have come under demand concern selling from deteriorating economic conditions outside of China. Surprisingly, crude oil is pegged on its spike lows this morning despite forecasts that China will post record oil imports this year. However, the trade has already been presented with predictions that Chinese crude oil imports/demand will increase by 500,000 barrels per day. However, with overnight predictions expanding the growth prediction range in Chinese imports/demand to as high as 1 million barrels per day, that should provide support to crude after macroeconomic selling has run its course. Given comments overnight from Europe suggesting the “historic energy crisis is receding” bearish sentiment is indeed expanding rapidly. In fact, reports overnight indicate the recent reduction in Russian oil production is likely the result of “unsold” supply and therefore a previous bullish development has turned slightly bearish. Apparently, news that OPEC+ plans to leave its current production reduction deal in place through the end of the year is seen as a negative as rising supply in the US and Europe will need to be offset by further reductions in OPEC+ production or the global surplus will expand rapidly. It should also be noted that India and China have seem massive financial windfalls from their purchase of Russian oil over the last several months at $24 to $34 per barrel discounts. Therefore, one could assume inflation issues in India and China could be less serious than in other parts of the world, thereby helping keep their oil demand strong.
NATURAL GAS
Just as we were very surprised in the magnitude of the natural gas market slide over the last several months, we were also surprised with the market’s capacity to consolidate for 8 trading sessions in the face of negative inventory readings and bearish temperature forecasts. Even more surprising is natural gas prices holding up in the face of a patently smaller than anticipated weekly withdrawal from EIA working storage of 100 BCF yesterday. The action in the natural gas market following a “small” weekly draw was impressive especially with the surplus to the 5-year average expanding and the US expected to have mild temperatures. However, temperatures in northwest Europe turn cooler directly ahead, but that increase demand might be posted against extremely soft US demand. Despite warm weather and signs of a serious escalation of bombing of Ukraine by the Russians we would not consider picking a bottom until US exports surge and there is a weather forecasts calling for sustained Arctic like temperatures. Some support for prices should flow from news of export flow from the Freeport, Texas facility especially since the EIA showed a significant jump in LNG exports in their latest report. In our view, the market has severely damaged the charts, and more declines are likely given relatively high seasonal inventories in Europe, unending Russian gas flows through Ukraine and given this week’s minimal withdrawal from inventories.
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