Written Commentary
CRUDE OIL
With the energy markets yesterday holding up and trading in positive territory in the face of new contract highs in the dollar, escalating global energy demand fears, and a tide of physical commodity selling this week, we think crude oil is beginning to take direction from the products. Another development likely to result in product prices pulling up crude oil prices is a large drop in Russian diesel exports reported overnight. Furthermore, we are very surprised in the higher price action today following news coverage of a possible EU delay in Russian sanctions reportedly because of the inability to get Hungary to agree to a ban. However, yesterday non-OPEC production was forecasted to fall by 300,000 barrels per day (obviously because of Russia) and the IEA also predicted “almost universal product shortages will serve to lift all energy prices into the summer”.
With a significant range up extension into new all-time highs extending this week’s low to high rally to $0.40 the bull camp retains control despite the overbought condition. As indicated earlier this week, the IEA sees tightness in product supplies pulling the entire energy complex higher. The IEA also labeled the current situation in product markets as “almost universal product shortages”. Certainly, an extension of the lockdown in China for another 7-days is fomenting fresh demand concerns, but recent global road traffic congestion measures are building again.
NATURAL GAS
As in the gasoline market, the natural gas market has displayed impressive resiliency in the face of weakness in crude oil, diesel, equities, and metals prices earlier this week. However, with US LNG profit margins very attractive for delivery into Europe in June, July, and August, US exporters are not as fixated on Asian demand. On the other hand, spot LNG buying overnight was largely from Asian customers. Going forward, a piecemeal Russian ban of gas flows to Europe through the Yamal pipeline appears to be underway following Russian sanctions of all Gazprom European subsidiaries as that should reduce supply for Europe. It also seems that tensions between Germany and Poland with Russia are escalating, increasing the chance the Russians are poised to weaponize energy in the battle against the world.
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