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Russian Oil Price Cap Implemented

CRUDE OIL

Clearly, additional chatter that China will continue to relax Covid restrictions offsets growing recession fears in Europe. As indicated by CNBC this morning traders should not underestimate the bounce in global energy demand with the reopening of Chinese cities. According to some CNBC dialogue this morning a full reopening of China could add 2.1 million barrels of daily demand for crude oil. However, Chinese government policy has been shifting back and forth and reduced Covid restrictions in the past have been less beneficial than initial expectations. However, given the precipitous decline in the US dollar, traders expected to see crude oil prices perform better in the last 2 trading sessions last week. While it is possible the market will see psychological support around the $80.00 level on the charts, a senior treasury official comment indicating that a $60.00 per barrel price cap will keep the markets well supplied and institutionalized the deep discounts on internationally offered Russian crude supply and that could lower support to $75.00. Despite Russian threats to cut energy supply because of the implementation of the price cap today, news that Russia is selling discounted crude oil to Pakistan indicates Russian supply continues to satisfy a portion of global demand. In our opinion, the price cap level of $70.00 was initially expected and not only did the Cap price decline, but a long list of aggressive restrictions on the Russian export process were watered down. On the other hand, a noted portion of the trade thinks Russia can easily survive the price cap, continue to fund its war, and threaten a cut back of supply. With the US nonfarm payroll reading coming in better-than-expected Friday, the threat of a US recession is mitigated but that potential supportive factor is partially mitigated by the simultaneous (but minimal) increase in the prospect of a December US jumbo rate hike. While the crude oil market saw much larger than expected declines in both API and EIA crude stocks last week, that supportive supply issue is heavily countervailed by the highest pandemic era production level in the US of 12.3 million barrels per day in September.

hand on gas pump

NATURAL GAS

In addition to a moderating of cold temperatures, the natural gas market is undermined following news that Moldova is negotiating with the Russian gas company Gazprom and by news that the Russian state oil company continues shipping gas to Europe through the Ukraine. Last week US gas drilling fell for a 2nd straight week and the prospects of sudden cold temperatures in Asia, North America and Europe should become more frequent. Even though the US starts the official gas inventory withdrawal season with only a modest deficit to the 5-year average of 2.4% we see that as bullish considering 2 straight weeks of expansion in the deficit which is taking place without the outflow of export supply from the fire damaged export facility. Unfortunately for the bull camp, reports last week indicated a restart for the Freeport facility “by the end of the year.” While the natural gas market from the COT positioning report measurement has declined $1.00 and that should puff up the net spec and fund short (which is probably the highest since the initial outbreak of the virus in the US), the trade feels capable of implementing additional short positions.

 

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