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Crude Vulnerable to Demand Threats

CRUDE OIL

While the bull camp has maintained control from the surprise tightening of supply announced by OPEC+ over the weekend, the bull case is being challenged today by credible demand concerns. Certainly, the 1.1 million barrels cut back on output from OPEC+ offsets a significant amount of softer demand and has reduced the prospects of a global surplus, but we think further demand concerns are likely following upcoming US scheduled data. Fortunately for US oil producers, the US dollar appears to have started a wave down move and that could provide WTI prices with a cushion relative to Brent crude oil. According to some reports this morning, further short covering/stop loss buying by hedgers is likely today. However, for the crude oil market to sustain and certainly to extend gains sharply, will likely require better energy demand conditions than have been presented so far this week. In addition to soft Chinese industrial activity readings from early Monday, the US showed weakness in both manufacturing PMI and ISM manufacturing data during the Monday US trading session and then saw a slight decline in US vehicle sales. Even though OPEC+ indicated their reduction was a precaution against softening global energy demand, demand signals from China and India have remained positive so far. Furthermore, India indicated the most recent monthly demand figures for gasoline, diesel and jet fuel were all roughly 5% above previous monthly readings. On the other hand, the most recent EIA crude oil stocks readings held a year-over-year surplus of 63.7 million barrels while the Cushing, Oklahoma storage surplus was nearly 11 million barrels over last year. Nonetheless, the energy market will be presented with a veritable avalanche of global scheduled economic data and with some data key price/inflation data, the markets are likely to constantly reshape their interest rate expectations. Therefore, significant volatility is likely and certainly crude oil is short-term overbought and vulnerable to additional threats against energy demand from soft data.

NATURAL GAS

The path of least resistance from both technical and fundamental perspectives remains down, with lingering cold in Europe unlikely to maintain its support of prices in the days ahead. Certainly, the May natural gas contract showed respect for the psychological $2.00 level on the charts, but bullish fundamentals remain absent. In fact, fundamentals like weather are turning more bearish with each passing day as the northern hemisphere winter is coming to an end. As if the bear camp needed fresh fundamental arguments, India posted a month over month decline in natural gas consumption while gasoline, diesel, and jet fuel consumption increased. Fortunately for the bull camp US March LNG exports posted a record with the trade expecting more new record export readings in the months ahead. However, with current EIA working gas in storage at a 21% surplus to 5-year average levels and the winter season winding down, we doubt even record exports will tighten supplies. The path of least resistance remains down with lower prices likely without a major paradigm shift.

 

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