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Crude Supply Anxiety Moderates Slightly

CRUDE OIL

While fighting in the Middle East continued overnight, supply side market anxiety moderated slightly but could return at a moment’s notice. The fresh supply threat from Middle East should mean bull camp today likely to see more benefit from improving demand conditions from a combination of chatter of a dovish shift at the US Fed, prospects of a decline in US interest rates from strong auction demand later today and from an extension of this week’s recovery in global equities. With tight global supply still a major backbone of the bull case, the trade will likely react aggressively to upcoming US supply news from the API and EIA. The late September/early October washout in crude oil was likely the result of sagging energy demand and an improvement in demand expectations today should shift the bias back to the upside.

offshore oil rig at sunset

NATURAL GAS

Pushed into the market, we think natural gas is expensive and vulnerable to further corrective action. Certainly, fundamental conditions have shifted and that should increase the odds the early October low will be a very solid low. Apparently, the trade has embraced improving demand conditions from improved macro sentiment and perhaps somewhat suspect buying off the anticipated beginning of cooler weather. While not a direct sign of improving natural gas demand, Chinese coal prices posted six-month highs which may increase Chinese demand for cheaper LNG. However, a six-month high in coal prices is likely a function of the beginning of the heating season, the threat against Australian and is not likely a sign of strengthening Chinese demand. On the other hand, the bull camp does have an extension of the supply threat from Australia as LNG unions are still threatening strikes against Chevron and will not meet with the company until tomorrow.

 

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