Written Commentary
CRUDE OIL
In our opinion, the initial Israeli attack in Syria at the end of last month resulted in a war premium of nearly $9.00 and therefore we see the prospect of a retrenchment below $80.00. However, according to Bloomberg, crude oil had a $25 war premium in place which could project prices down to $75 if supply fears from the Middle East continue to deflate. Fortunately for the bull camp, a private energy consulting firm yesterday suggested global floating storage of crude oil declined by 18% over last week and there appears to be improved macroeconomic sentiment this week emanating from a recovery in equity markets and from mostly positive euro zone PMI data overnight. Nonetheless, the trade continues to be concerned about softening energy demand which until recently was being fully offset by concerns of Iran retaliating against Israel. However, concern toward Middle East supply has moderated because ideas that Iran did not respond aggressively to the latest attacks with threatening statements. This week’s Reuters poll pegs EIA crude oil inventories to increase by 1.8 million barrels and for the refinery runs to increase by 0.5%. Another weekly inflow to EIA crude oil inventories would be the fifth straight weekly increase with the year-over-year deficit narrowed from 36.1 million barrels (from March 15th) to less than 6 million barrels. A minimal and unconfirmed support for the market is chatter from India suggesting commercial middlemen are likely to be buyers on ongoing price weakness. Another minimally positive development came from UBS predicting Brent crude oil will trade $91 per barrel by midyear.
NATURAL GAS
With China announcing their imports of coal from Russia declined by 21% last month that could increase natural gas demand from increase Chinese electric generation. Furthermore, the Freeport export facility has returned to near capacity levels which increases US supply flow out of the country and might slow normal seasonal rebuilding of inventories until cooling demand becomes material. However, it is unlikely the Freeport export facility will pull down excess supply in the US especially with that facility having a track record of periodic downtime. Another minor support for gas prices today came from a noted extension of a Norwegian outage. A limiting force for natural gas is a 5% increase in Chinese natural gas production in the first quarter of this year.
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