Written Commentary
CRUDE OIL
Clearly, seeing crude prices remain within striking distance of multi-month highs in the wake of a very large 7.1-million-barrel jump in API crude oil stocks from yesterday afternoon, highlights the markets focus on improving demand. Along those lines, the bull camp is emboldened by a 5.7% increase in Indian January oil imports (a 21-month high), a significant jump in Chinese traffic levels, predictions that crude oil exports from a Texas facility next month will be a record and perhaps most importantly, from a very positive global wave of optimism emanating from AI inspired equity gains. Furthermore, a downside failure in the dollar combined with escalating tension between the Russian President and the US president adds to the pre-existing, undying, and perhaps overstated threat against Middle East supply. Unfortunately for the bull camp, the 7.1-million-barrel jump in API crude oil stocks from yesterday could portend a similar larger than expected jump in EIA crude oil stocks later this morning and that could be cause for temporary back and fill setback. In a potential longer-term supportive development in oil, an industry watchdog group made waves earlier this week by calling on the US Department of Interior to enforce lease terms on expired leases in force from 2010 to 2020. The watchdog group indicated that 40% of wells on expired leases were not plugged as required and reported that 50% of offshore oil platforms on expired leases have not stopped production. While it is not clear how much production still flows from expired leases, seeing the Department of Interior enforce lease contract terms could reduce what continues to be record US crude production. In the short-term, the weekly EIA report is expected to show an inflow of crude oil stocks between 3.9 and 4.3 million barrels per day and that bearish potential is given added credence by a private consulting agency prediction that US commercial oil inventories increased by 5 million barrels this week. We give the bull camp a slight edge despite what appears to be a loss of upside momentum.
NATURAL GAS
Seeing natural gas prices maintaining this week’s gains against bearish overnight news is surprising. In addition to above normal temperatures in the US, speculators should be unnerved by predictions from the German economic minister who predicted even lower gas prices ahead. Obviously, a portion of the recent recovery was classic short covering, but the recovery might have been prompted by news that Chesapeake Energy will reduce production this year by roughly 30% given extremely low prices. Unfortunately for the bull camp, Chesapeake also indicated the market is “clearly oversupplied” and therefore it could take considerable time to deflate supply. In a longer-term supportive development, a private Chinese LNG buyer has reportedly rented unused terminal space potentially signaling a buildup of Chinese strategic gas supply. With the most recent COT positioning report in natural gas showing a net spec and fund short of 101,275 contracts, and the market falling $0.15 into the Tuesday low, the gas market was likely heavily oversold, and this week’s bounce is likely heavily related to short covering.
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