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A Corrective Bounce For Energies


We suspect part of the recovery action in crude oil this morning is beginning of the year allocations with another portion of the buying interest resulting from global crude in floating storage declining by 16% last week. In fact, Asian Pacific floating storage fell by 32% and now stands at 33.3 million barrels. The market is also likely to draft fresh support from intensified fighting in Ukraine, increasing clashes between the US Navy and Yemeni terrorists and most importantly from news that Iran has sent a warship into the Red Sea. While a direct confrontation between the US and Iranian navies is unlikely, an exchange of fire is likely to result in a sinking of the Iranian vessel which in turn would dramatically escalate the threat against supply. Iranian exports are just under 2 million barrels per day and therefore are significant in the global pricing scheme.

Energy production


Like the crude oil market, the gasoline market is showing corrective gains this morning off increased military movement in the Red Sea, but the market remains overbought in speculative categories and should see headwinds from a decline in December Indian gasoline sales. Initial resistance in February gasoline is $2.20 with a reversal down seen on a failure of $2.14. While the diesel market is showing corrective bounce action early, the recovery is the most anemic in the petroleum markets. In addition to the decline in Indian December diesel sales, the diesel market is also undermined by Russian plans to raise diesel exports by 18% or 817,000 barrels per day more than in December.


The natural gas market has started the year extending a pattern of higher lows in higher highs beginning on December 21st. Not surprisingly, the market is higher this morning in the face of a Bloomberg report that US heating demand was 54 heating degree days below normal last week and from concerns that natural gas flows will be disrupted if military action between the US and Iran unfolds in the Red Sea. From a longer-term perspective, the gas market should see support from news that China has returned coal imports tariffs which have reduced the amount of coal imports from Russia from their peak in June. Lower Russian exports of gas to China opens the door for other international sales.


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