Written Commentary
CRUDE OIL
The early corrective action in crude oil is justified by renewed Chinese energy demand concerns following soft Chinese data, a 10% decline in Japanese December crude oil imports and a lack of a definitive bullish view from the Russian oil minister overnight. In fact, Russian comments that “current oil prices are adequate” is hardly a ringing endorsement of the bull case. However, the bull camp is not without support today with Middle East tensions continuing, signs of reinstituting sanctions against Venezuela, a much larger than expected decline in API crude oil stocks, and residual support from the Aramco request to lower its maximum production capacity. It goes without saying that the bull case is heavily reliant on expectations of a US retaliation against those responsible for the deaths of three US military personnel in the region. On the other hand, the US Department of Defense has indicated they were not looking for a war with Iran, but they would punish those involved in the drone attack. Yesterday, crude oil prices were held back by noted weakness in oil patch shares which were apparently under pressure from fears of sagging energy demand in China which were revived by overnight slack Chinese data.
NATURAL GAS
In our opinion, the natural gas market is short-term oversold but not exhausted yet. While stochastics remain in “sell” mode, open interest continues to rise as if there is some bargain hunting buying surfacing. In fact, Bloomberg stories overnight suggested there were signs of European bargain hunting buying. However, given the dominating bearish impact from mild weather, a recent reduction in US LNG export flows and EIA inventories holding at a surplus to five-year average inventories of 5.2%, bottom pickers have little evidence to support their case. This week’s Reuters poll projects EIA natural gas in storage to decline by 166 BCF to as much as 201 BCF. However, reports that European solar panel companies are requesting emergency support could result in Europe needing LNG to replace solar power if company failures disrupt infrastructure.
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