Written Commentary
NATURAL GAS
With another higher high extension overnight the natural gas market continues to defy bearish fundamentals. In fact, overnight Bloomberg coverage suggests that without a sudden shift to much below normal temperatures over the next 50 days, the northern hemisphere winter is likely to be judged as very mild. The surprising rally overnight has virtually discounted an overnight analyst prediction that US natural gas stockpiles will remain burdensome despite an outbreak of cold US temperatures slated for January 13th and 17th. In yet another bearish discounted development, Chinese gas output last year was documented to be a record seventh straight annual increase with a gain of 5.6%. However, the charts in gas remain bullish with yesterday’s attempted washout rejected and the pattern of higher highs and higher lows extended today. This week’s Reuters poll projects EIA natural gas in working storage to decline by 111 to 104 BCF. However, with the much smaller than expected draw last week (the smallest of the current withdrawal season) it is possible that the trade could be surprised with a larger than expected withdrawal this week. In the end, we are suspicious of the bull case despite the bullish evolving charts.
CRUDE OIL
While Bloomberg overnight carried a story suggesting OPEC+ will extend and perhaps expand production restraint because of deteriorating demand, the trade is doubtful of full compliance with more restrictive policies. However, there is a flicker of hope from the demand side of the equation with the trade presented with signs of ongoing strength in Indian fuel demand and indications Chinese refiners are planning to increase run rates this month. On the other hand, the market yesterday was presented with a widely embraced sign of softening energy demand from the Saudi price cut to Asian customers to 27-month lows, with traders taking that large reduction as a sign of less bids from China. Yet another negative price force is the continuation of hedge fund selling and the net spec and fund short venturing toward the lowest levels since 2011 as that highlights broadly bearish spec and fund views in the marketplace. This week’s Reuters poll projects EIA crude stocks to decline by 1.2 million barrels with last week’s 5.5-million-barrel EIA crude stocks decline one of the few bullish factors in the weekly EIA report. Even though the slackening demand theme is entrenched in market sentiment already, a second straight week of massive declines in EIA implied gasoline and distillates would add to the negative demand argument. Bearish news flows from the supply side of the equation include EIA crude oil stocks maintaining a 10.4-million-barrel surplus to year ago levels and news yesterday that global floating storage of crude oil increased by 2.1% last week.
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