Written Commentary
CRUDE OIL
With a significant setback from last week’s highs in the early trade today, the recovery action from last week is erased with both supply and demand fundamentals generally favoring the bear camp. The bear camp should see fresh confidence following a 2.1% weekly increase in global crude oil in floating storage especially with supplies in Asia Pacific and European areas up sharply. In fact, US Gulf Coast supplies also jumped 175% versus last week in a sign that could mean US export supply is beginning to back up. In a possible sign of soft Asian demand and in response to the weakness in futures prices since the end of December rally, Saudi Arabia cut Asian prices to 27-month lows, which clearly adds to the bearish demand outlook. It should also be noted that discounts of Russian, Iranian and Venezuelan oil have been reduced in another sign of adequate supply and soft demand. In fact, talks between Iran and China regarding crude sales have broken down with Iran demanding higher pricing and the Chinese unwilling to pay up. Fortunately for the Venezuelan oil companies, the Biden Administration has facilitated competition for US producers and exported some GDP. Last week, US oil drillers raised rigs operating by one but total rigs operating at 657 rigs is down sharply from the pandemic high of 784 rigs two years ago. Unfortunately for the bull camp, the net spec and fund long in crude oil remains near the lowest levels since 2011!
NATURAL GAS
While the natural gas market has failed to sustain the overnight range up move, the February contract managed to reach the highest level since November 24th in a move that has the bear camp concerned. Perhaps the reversal from the overnight high is the result of the trade looking beyond the current European cold snap to slight warmer temps and perhaps the market also fell back following reports that many vessels continue to use Red Sea routes despite reports to the contrary. However, there is a threat against gas flows to Europe from Libya, potential gas disruptions from fighting in the Middle East, more seasonal winter temperatures settling in, and US exports are consistently running at record levels. Another potential supportive issue is the net spec and fund short in place in gas since March 2021, as some traders think prices were too cheap and a severe cold pattern and/or a physical disruption of supply from Libya or Iran could ignite a sustained wave of short covering.
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