NATURAL GAS
After questioning the natural gas markets capacity to avoid renewed selling over the last several weeks, the extension of last week’s slide is not surprising at all. In fact, as indicated last week, it is very difficult to offer a credible fundamental reason for the market to avoid a return to the February lows. US inventories continued to build relative to year ago levels, the trade expects a smallish inventory withdrawal again this week (relative to seasonal levels), northern hemisphere temperatures remain mild to average and temperatures are likely to begin their normal seasonal climb in the coming weeks. Certainly, a surprise entrenched Arctic front could surface but sometime soon that type of event could lose its capacity to lift prices. Furthermore, the Russian national gas company continues to send gas to Europe through Ukraine pipelines, and we suspect sagging petroleum demand views are deteriorating LNG/natural gas demand views. While the bull camp could see support from overnight news that Norway gas output last month was below forecasts, Europe has cut total gas consumption by 22% in the 3 months from October to December relative to year ago levels.
CRUDE OIL
The extension of yesterday’s recovery bounce and strong close combined with follow through gains this morning is likely to result in a combination of short covering and speculative buying today. Speculative buying is clearly the result of a measure of financial sector relief. However, the bull camp should be emboldened by overnight reports China continues to buy crude because of expanding refinery activity. It is also possible that buyers see the strengthening ties between Russia and China as a possible catalyst for Chinese military aid to Russia. Obviously, seeing China overtly provide lethal military assistance to Russia would shift the war definitively in favor of Russia, with the West unable to match Chinese assistance. This week’s Reuters poll projects EIA crude oil stocks to decline by 1.4 million barrels, but the focus of the report will be on the status of East Coast crude oil inventories. However, beyond the fear of slumping demand are negative developments regarding supply with Russia posting top crude supplier status to China in the first two months of this year with a startling year-over-year gain of 23.8%. While classic supply fundamentals in the energy markets are not bullish, they are certainly not bad enough to justify the type of sharp declines seen recently.
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