Written Commentary
CRUDE OIL
Clearly, the energy markets are benefiting from fresh supply threats which for the time being are managing to offset ongoing demand destruction fears arising from unending recession headlines. While the markets were aware of the supply disruption potential in Libya earlier this week and were also aware of the impending Norwegian oil worker’s strike (July 5th) a 3-day $10 break in prices leaves the market vulnerable to minor bullish news. However, the bull case is partially undermined because of news of fresh US efforts to expand Gulf oil production and from this week’s EIA inventory report which produced signs of “repair” of tight product inventories and more importantly highlighted a lack of strong/improving implied demand for both gasoline and distillates.
The charts alone in gasoline point to significant downside follow-through ahead. Fundamentally, the trade is already looking beyond the seasonal “peak” in US gasoline demand and demand expectations are also being undermined because of analysis suggesting high prices are discouraging use. In a more sustainable bearish development, seeing the US refinery operating rate running at the highest levels in several years should increase gasoline flow to the market and that in turn is likely to result in an extension of the recent weekly pattern of EIA inventory builds and further contraction in the year over year stocks deficit.
NATURAL GAS
We see the massive failure yesterday in natural gas prices the result of a growing list of bearish developments. First and foremost, the trade has not been threatened with “widespread” intense and entrenched heat throughout the US and most of Europe. Secondly, the beleaguered Freeport export facility shut down (ultimately projected at 90 days) is thought to be raising US working gas in storage. Sentiment is so bearish toward natural gas that German warnings of a possible blockage of the Nord Stream One pipeline was given almost no consideration yesterday. Other bullish developments discounted by the trade this week are a looming Norwegian oil union strike set to begin on July 5th, and a 5.3% jump in Dutch wholesale gas prices.
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