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More Global Crude Tightening

CRUDE OIL

It is not surprising crude oil has recovered sharply with further evidence of global crude oil tightening surfacing again overnight. Evidence of tightening supply include a 1.9% week over week decline in European storage and a 14-month low in Cushing Oklahoma storage levels. Furthermore, crude oil demand from China continues to run strong despite the tenuous Chinese economy as Chinese refineries continue to process massive amounts of fuel to meet global demand. According to Chinese sources Chinese refiners see improving global flight numbers and the Russian fuel export demand as a major opportunity to gorge on very attractive refinery margins. With significant crack margins and the potential for support for the Chinese currency from a burst of energy product exports, the government is expected to issue additional export quotas for fuel and could eventually increase import quotas for crude oil. We suspect Cushing Oklahoma operators will aggressively attempt to build storage to avoid falling below minimal operating levels, but a shutdown of that facility could tighten the availability of US exports through the Gulf of Mexico prompting higher global prices and lower local prices.

Oil Refinery

NATURAL GAS

With stories confirming global efforts to rebuild strategic storage for the coming winter, the prospect of significant bargain-hunting buying for winter storage needs is declining. In fact, over the last several months we have seen evidence of sovereign entities like France, Germany, China, and Japan all moving to fill storage. Nonetheless, there should be additional buying interest from those looking to top off reserves. However, all is not lost for the bull camp as Bloomberg has predicted emerging Asian LNG demand will increase by 20% this winter versus last. While some US weather is supportive of natural gas prices, most of the US is beginning to see steady seasonal cooling fall and that should extract further drought/cooling needs premium from prices. In fact, a reading above the range could signal the beginning of the shoulder season recharge, which in turn might send natural gas futures prices plummeting toward higher cost of production sources. While the net spec and fund short is building, we think the spec short must double from current levels to suggest a major washout low has been posted.

 

 

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