Written Commentary
CRUDE OIL
The relatively narrow trading range in crude oil over the prior three trading sessions is justified by the fact that Chinese oil demand expectations have been revised upward at the same time Goldman Sachs predicted OPEC will begin to unwind production restrictions later this year. However, Goldman Sachs also sees the potential for 1st half tightness in world supply to send Brent crude oil back to $105 per barrel by the 4th quarter. Other critical overnight developments included news that Russian sellers will narrow the price discount to world market prices. Even though the energy markets have fully embraced news that Chinese import quotas are running ahead of year ago levels, that situation combined with a reduction in Chinese travel restrictions should leave demand views improved in the days ahead. Adding into the newfound bullish fundamental environment is a noted improvement in global economic psychology from speculation that the US Fed is gaining the upper hand on inflation and could be less aggressive than feared in 2023. Morgan Stanley thinks mild US and European temperatures have discouraged speculative buying but given the market’s aggressive rejection of last week’s low of $72.46, we think crude oil has made a temporary bottom. While it might require an extension of risk on global sentiment through the Thursday US inflation report, crude oil might be headed back up to downtrend channel resistance which is located at $80.22 today.
NATURAL GAS
Overnight news that Ukraine has extended the ban on gas exports was countervailed by several reductions of LNG prices in different areas of the world which could minimally help demand. Despite the $0.60 bounce in February natural gas prices from last Friday’s lows, the prospect of further gains is limited to technical short covering buying. In fact, Russian gas supply flow through Ukraine remains steady and the latest US temperature forecast has extended above normal temperatures into the last week of January. European weather forecasts are slightly supportive with normal temperatures expected ahead. On the other hand, forecasts for “abnormally” cold temperatures in central Asia could prompt some speculative buying and in turn provide some fundamental support in February natural gas around last week’s double low of $3.90. This week’s Reuters poll projects EIA working gas in storage to decline within an extremely low range of -7 bcf to -73 bcf, and that alone is a very serious blow to the bull case. Without some sudden unforeseen 180-degree shift in natural gas fundamental headlines, prices should fall.
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