Written Commentary
CRUDE OIL
It is not surprising to see crude oil prices generally chopping back and forth within a trading range of four dollars this week as the overriding fear of a coming global supply glut was countervailed this week by a very large declines in US API and EIA crude oil inventories. Certainly, prices continue to be cushioned by the “prospects” of a Middle East supply glitch from a physical clash between the US Navy and Iran. However, uncertainty toward supply flow in the Middle East is also ratcheted upward by the potential of an inland US attack of Yemeni rebels as US Arab-based backlash typically intensifies if a physical breach of sovereign territory is seen. Unfortunately for the bull camp, the weekly inventory reports showed very bearish large inflows to product inventories and implied demand readings for gasoline and distillates were very soft. Another market structure bearish signal is the approach of contango pricing in Brent crude oil. On the other hand, Iran has apparently reduced its discount pricing for Chinese customers in a sign that might be seen as solid demand. In the end, it is possible that part of yesterday’s reversal was the result of the previous day’s overreaction on the upside following an increase in tensions in the Middle East. Unfortunately for the bull camp, strong US jobs data yesterday did not help energy demand expectations, perhaps because both EIA gasoline and distillate implied demand readings plummeted. In conclusion, the crude oil supply glut fears were not removed this week and without a physical supply disruption of consequence the bear camp holds an edge.
NATURAL GAS
While the gains in natural gas prices this week were impressive considering market action over the last year, there does not appear to be a significant shift in fundamentals in favor of the bull camp. However, the ability to sustain a higher early trade yesterday in the wake of a very small weekly withdrawal, and in the face of a massive jump in the surplus to five-year average stock levels from 10% last week to 13% this week, should have been a serious blow to the bull camp. While the markets clearly saw buying interest from a shift to colder temperatures early this week, the market has started off softer this morning likely because Asian buyers appear to have stepped back because of high prices. Longer-term the market should see support from strong Chinese gas demand forecasts for 2024 and from the shutdown of two Libyan oil fields. As indicated yesterday, Libya supplies Europe with notable LNG supply and therefore events in Libya should not be discounted. While the technical trend is up our fundamental sense questions this week’s rally.
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