Written Commentary
NATURAL GAS
The rally in natural gas prices this morning is taking place in the face of bearish near-term European weather, German storage reportedly at 99% targeting and confirmation from Russia that gas flows through Ukraine continue to be steady. However, there has been a forecast of a cold winter in the UK and the Russian pulled out of a UN food shipping deal over the weekend which could result in aggressive efforts to invoke a price cap on Russia gas which the Russians have indicated will result in a halt of all shipments. The weather outlook for Europe favors the bear camp with unseasonable hot temperatures in portions with temperatures in southern Europe running 10 Celsius above normal. However, there is a cold front moving into the Northwest US by the middle of the week with some storms potentially sparking talk of an early start to winter. The net spec and fund short in natural gas has reached the lowest level since the beginning of US lockdowns in 2020. However, with the natural gas market from the COT report into the low last Friday falling $0.62 the market probably reached a very significant oversold condition last week. In retrospect, last week’s smallish weekly US injection should have provided more support to the market but a backup of tankers off Spain, mild European temperatures ahead and fear of slumping Chinese demand following additional lockdowns leaves the preponderance of fundamentals bearish.
CRUDE OIL
Apparently, the Russian exit from the UN Food/Black Sea shipping agreement has not provided support to energy prices this morning perhaps because rising Chinese energy demand fears are present this morning following poor PMI readings and additional Covid lockdowns. Tempering the bearish Chinese demand threat is news of further declines in Chinese on shore crude inventories in the second half of 2022. Bearish influences to start the trading week are the beginning of the latest OPEC+ production cut back, a 2.7% week over week increase in crude oil in floating storage and expectations for a surging US dollar from a hawkish Fed meeting on Wednesday. Unfortunately for the bull camp, Russia increased its seaborne exports to Asia significantly in the first 20 days of October in a development is likely part of their effort to increase product exports. Into last week’s lows, the net spec and fund long in crude oil was likely near the lowest levels since the beginning of September 2016. Some countries are showing signs that high prices are beginning to hit local consumption with Indian September crude oil imports down by a significant 6.7%. There are also signs of a surplus of supertankers in the Persian Gulf with excess tankers versus actual tankers needed jumping 16% from the prior week!
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