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Bears Have An Edge in Energies

CRUDE OIL

We are somewhat impressed with the June crude oil market’s capacity to hold gains into the close yesterday and limit downside action early today given the magnitude and breadth of selling of physical commodities and global equities. The noted declines in commodities and equities clearly deflate energy demand expectations. Even more impressive is the crude oil market’s limited slide in the wake of news of ongoing Chinese purchases of Russian oil. Seeing China continued to purchase Russian oil pulls supply from a source thought to be shutting down. However, the IEA suggested shut in Russian production last month was 1 million barrels per day. Chinese demand fears were blunted overnight after a forecast of growth in Chinese gasoline demand this month.

With the gasoline market rejecting the $3.50 level for a second straight session yesterday and holding up relatively well this morning, the trade continues to embrace the bull case. The impressive resiliency in gasoline is probably the result of a large headline draw in EIA gasoline stocks of 3.6 million barrels, a 4.7% decline in Singapore weekly fuel inventories and from IEA predictions of a 7.4% increase in Chinese May gasoline demand. However, US implied gasoline demand has remained static over the last 5 weeks and record retail pump prices continue to foster predictions of softening demand.

NATURAL GAS

While a portion of the run up in natural gas prices yesterday was likely a function of the massively oversold technical condition of the market, the bull camp was emboldened by news of a gas pipeline shut down in Ukraine. However, intelligence sources suggest the pipeline shutdown was not purposeful and instead was the result of fighting around the valves. Furthermore, reports overnight from Germany suggest Russian gas flow continues and hinted that Russian gas might continue to flow to Germany even with an EU agreement to ban Russian gas.

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