Written Commentary
CRUDE OIL
On the one hand, energy prices this week clearly benefited from improved global energy demand expectations and that in turn helped crude oil survive another inflow to US crude oil inventories. Obviously, evidence of a resilient US economy combined with a slight brightening of skies in China justifies adjusting energy demand prospects higher. Furthermore, the crude oil trade sees the Yemeni terrorists as a serious threat to supply with sophisticated weaponry most likely provided by Iran. Apparently, a middle of the road injection to EIA crude oil stocks yesterday was a relief to the bull camp after a massive inflow to API inventories was reported earlier this week. In fact, yesterday crude oil prices post EIA report managed a new high for the move and the highest trade since January 29th which suggests a four-week pattern of inflows to crude stocks was readily discounted. However, despite the extending pattern of weekly inflows to EIA crude oil inventories, the year-over-year deficit has continued to rise and now stands at a very material 36 million barrels. In the end, favorable US economic data has helped underpin hope for improved energy demand, but improved demand has not helped support US product prices.
NATURAL GAS
While there is not a strong fundamental case to predict a bottom in natural gas prices, extremely low prices are beginning to have an economic impact on US production. However, this week’s EIA inventory report showed the surplus to five-year average stocks level exploding to 22.5%, leaving the current supply environment entrenched in the bear camp. Long-term bottoming news came from Chesapeake Energy plans to reduce production by 30% this year because of low prices, but also because of the potential for gas production to be shuttered by the Department of Interior from the enforcement of lease terms which required capping of wells and idling platform activity on expired leases. Unfortunately for the bull camp in the near-term, continued weakness in Asian prices, a recent balancing of the oversold technical condition and mild weather leaves the bear camp in firm control.
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