Written Commentary
CRUDE OIL
While there are few signs that macroeconomic conditions impacting energy demand expectations are set to improve, the massive decline in prices this week, the decline in crude inventories this week, the large range down rejection of a new low for the move this morning, and the net spec and fund short in crude likely reaching the lowest level in 7 years, should create an intermediate low in crude oil. Another sign of excessive bearishness came from a Morgan Stanley reduction of 3rd and 4th quarter Brent crude oil price forecasts of $12.50. Furthermore, technical indicators highlight an excessively oversold condition with the RSI in crude oil yesterday nearly matching the lowest level in 2 1/2 years. However, this week’s EIA crude oil stocks decline was smaller than expected and the smallest in 3 weeks and big oil earnings this week showed very strong production. A development from yesterday that did not result in a noted price reaction were reports that Ukraine attempted to assassinate the Russian president with a drone attack. On the other hand, given the personality of the Russian leader, traders should expect some type of swift retaliation perhaps in the form of an assassination attempt on the Ukrainian President. A logical downside target in July crude at $67.04 was violently taken out overnight and the market this morning has recovered back above that key pivot point.
NATURAL GAS
At present, it is extremely difficult to offer issues capable of halting the slide in natural gas. In fact, unless Russia manages to assassinate the Ukrainian President in retaliation for the attempted assassination of Putin, and something disrupts Russian gas flow through Ukraine, there will be very little significant supply-side concerns capable of discouraging sellers. Furthermore, slumping demand signals a 2.2% decline in US electricity output last week and the nearing end of the heating season the bull camp is left without fundamental support. In conclusion, reports of significant supply sitting in import position off Europe and declining seasonal demand natural gas could be headed back to the lowest levels since late 2020. From a technical perspective, natural gas prices from the last COT positioning report (April 25th) have declined $0.32 or 12% potentially pushing the net spec and fund short in natural gas to the highest levels since the beginning of the Covid lockdowns. The path of least resistance is down with weekly injections likely to grow consistently which in turn will likely expand the surplus to 5-year average inventory levels.
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