CRUDE OIL
Certainly, the crude oil market deserved a significant rally this morning but a gap higher opening of $4.30 could be an overreaction. However, before the OPEC plus production cut announcement, crude oil prices rallied sharply in the face of news last week that US crude oil output in January reached the highest level since March 2020. Given the history of surplus and deficit readings for the global oil market, seeing OPEC+ pledge to reduce output by 1.1 million barrels per day is a very significant development. The production cuts are more likely to be carried out than usual with several producers currently unable to maintain steady output. The likelihood of removing significant oil supply from the market is increased substantially by the fact that Saudi Arabia has committed to reducing its output by 500,000 barrels per day. While a general return to global “risk on” provided crude with significant lift last week, forecasts from the Chinese national oil company predicting a 3% growth in fuel demand this year over pre-pandemic fuel consumption levels is another major catalyst for the bull camp. Certainly, US crude oil inventories overall are burdensome for prices, but crude oil tightness on the East Coast combined with lower OPEC oil output in March and given the 1.1 mbd forward production cut from OPEC+ there are several very bullish supply-side issues
NATURAL GAS
While the natural gas market rejected a new contract low and posted a strong close last Friday, technical signs of a bottom are immaterial given the list of bearish fundamentals facing the market. In fact, last week the withdrawal from EIA working gas in storage was very small at 47 BCF with US inventories now likely to end the winter heating season significantly above 5-year average storage levels. At this point, forecasts of “cold” will have declining value and the best the bull camp might hope for is sideways consolidation. However, to achieve sideways consolidation action will require very definitive risk on sentiment, signs of significant expansion of US exports or a disruption of Russian gas flow to Europe through the Ukraine. Unfortunately for the bull camp, the latest reports have Russian gas flowing through Ukraine pipelines at running at a consistent pace. From a fundamental and technical perspective, the bias remains down in natural gas with the bull camp hoping the bear camp is becoming bored or impatient. At present, we see lower lows without significant and very surprising bullish headline developments.
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