Written Commentary
CRUDE OIL
While we expect today’s US inflation reading to impact the first several hours of trade in the energy complex, the bear camp is likely to garner the edge after outside market influences moderate. In fact, business sentiment in China registered a record low from unrelenting Covid restrictions, with projections of millions returning to lockdown and the number of cities seeing fresh restrictions expanding. Other demand signals overnight were mixed with Japan posting a 5.1% jump in September crude oil imports while Indian September crude oil imports declined at the largest pace in 18-months. On the other hand, China reportedly stepped in and bought significant barrels for refiners this month to ramp up fuel exports. Therefore, reports of severe diesel supply tightness in Europe and two-year lows in Chinese diesel inventories should provide indirect support to crude oil going forward. The bull case already had tight diesel supply forces at work earlier this year and with colder temperatures approaching next month, diesel/distillates could soon play catch up to the gains in gasoline and in turn raise fair value pricing in crude oil. The trade should continue to see lift from next week’s looming implementation of OPEC+ production cuts, even though the cuts are expected to be half the agreed upon amount. However, the bull camp is also benefiting from an improvement in energy demand expectations prompted by less fear of Fed overtightening, but that view could be tested today following US PCE. Certainly, seeing US weekly crude oil exports rise above 5 million barrels per day in the face of a very highly valued US dollar signals better international demand.
NATURAL GAS
We leave the edge with the bear camp in natural gas as US and European forecasts into the end of the first week of November call for mild temperatures. In fact, temperatures in New York City next week could reach 68 degrees Fahrenheit (20 degrees Celsius) with warm to mild temperatures also seen in the Eastern “half” of the US. In retrospect, the natural gas market failed to hold up in the wake of a “smallish” weekly EIA injection to storage yesterday and that might be the result of predictions that total European gas storage could end the coming winter at 33% of capacity. Furthermore, prices were not supported despite the week over week expansion of US working gas in storage deficit to the 5-year average. Total storage stands at 3,394 bcf, or 5.5% below the 5-year average. Over the last four weeks, natural gas storage has increased 417 bcf. It should be noted that working gas in storage in the US should begin to fall in the next 2 weeks according to seasonal history. We leave the edge with the bear camp with weather remaining bearish through the end of next week and the market yesterday failing to find support in the wake of a very small weekly injection figure. The latest estimate on the return of the Freeport export facility has not been established yet although some feed gas deliveries were made to the facility last week.
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