Written Commentary
CRUDE OIL
While we do not see a complete near-term reversal of fortunes for commodities and the global economy, aggressive central bank rate hikes and very significant declines in key commodities like crude oil are likely puncturing the inflationary bubble. Therefore, further weakness in the economy from near term data could set the stage for the pricing too much energy demand destruction. Demand Destruction is well known in the energy complex as that type of force hit energy prices very hard throughout the pandemic and has been dominating crude oil since June 22nd. Softening demand is one thing, but crude oil as usual saw concentrated demand fear swamp the market which in turn sparked hedge selling, refiner selling and stop loss selling by fund and small spec traders.
While this week’s EIA implied gasoline demand reading is likely to “hold together” (because of the main US summer driving holiday weekend), the trade is already anticipating peak demand shifting into the rearview mirror. Looking back, US implied gasoline demand peaked in the first week of June and has held below year ago levels since the beginning of May. Combine the passing of the peak seasonal demand window in the US with the highest US refinery operating rate (95%) since 2019, and you have a supply and demand condition clearly favoring the bear camp.
NATURAL GAS
Relatively speaking, the natural gas market held up better than a large cross-section of physical commodities in yesterday’s big picture broad-based physical commodity market beatdown. In fact, without pockets of extreme heat with humidity in the US and Europe, natural gas could have continued directly down to $5.00. It also goes without saying that the Norwegian oil worker’s strike which cut physical gas supply flows by 56% did serve to cushion natural gas prices yesterday; therefore, signs of a settlement in the Norwegian oil worker’s strike will likely result in a sub $5.00 August natural gas price spike.
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