Written Commentary
NATURAL GAS
With a gap down washout in natural gas to start the week and a fresh lower low this morning, mild US temperatures in the coming two weeks has seemingly ended the 2024 winter supply threat in the natural gas futures trade. However, there is the potential for another polar vortex in the middle of February but that should not help support prices in the near-term. While the late December low of $2.098 could offer a measure of support, the bear camp has a list of themes operating in its favor and a downside breakout is likely. In fact, overnight Asian LNG prices continued to decline despite Russian attempts to raise prices to China yesterday.
CRUDE OIL
Taking a step back, it appears that the petroleum markets have embraced slightly better energy demand expectations from positive US data with the trade apparently no longer disappointed in the lack of an early 2024 US rate cut. Certainly, Middle East supply issues continue to add a measure of support for prices but talk of a “new front” in the war between Russia and Ukraine involves both sides attacking energy infrastructure and disruptions of Russian refinery activity and or exports is critical with Russia becoming the largest exporter to China. Furthermore, reports are tankers utilizing Red Sea transit continue to drop which in effect locks in some supply and or presents enough delays to shift demand to other sources. In addition to the Ukraine drone attacks on Russian oil infrastructure, poor weather has also reduced Russian supply flow with crude oil flows this month falling by 150,000 barrels per day. Fresh negative developments include Libya returning to 1.2 million barrels per day of production after restarting its largest oil field and news that Norway increased production by 1.9% this month. In a slightly negative crude oil centric development, US Gulf Coast refinery activity has been slow to recover from the cold blast and that could have backed up US crude supply last week. While we continue to doubt the upside capacity in crude oil given ongoing concerns of slowing global demand and rebuilding supply, yesterday’s rally above the 200-day moving average suggests something more than simple technical balancing is lifting prices. In a minimal negative, US temperatures return to normal but consistent gains in equities and “Goldilocks” US scheduled data has seemingly improved the global economic outlook which in turn should help tamp down energy demand concerns. We give the edge to the bull camp, but do not see strong fundamental evidence to back up an upside extension.
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