Written Commentary
NATURAL GAS
Clearly, the corrective bounce from last week has been aggressively reversed, with European and US weather patently bearish and a (+22%) massive surplus to five-year average storage levels in the US likely set to result in fresh contract lows. In fact, the natural gas market retains last week’s short at 117,000 contracts compared to the net spec and fund short of 150,000 contracts one year ago indicating the market is not mostly sold out yet. In a longer-term supportive development Bloomberg overnight indicated Chinese LNG import capacity is expected to rise sharply this year and is expected to reach 170 million tons per year. Furthermore, local Chinese city gas distributors have started purchasing LNG outside of normal government channels.
CRUDE OIL
With a negative technical trade to end last week’s action, followed up by negative technical action early today, the bull camp is lucky to have had improving energy demand expectations surface last week, especially with classic supply fundamentals in the US pointing to a rebuilding of crude oil inventories. However, the liquidation bias should be mitigated by a 7.5% decline in global crude oil in floating storage with inventories this week reaching the lowest since October. Furthermore, this week’s floating storage readings showed Asian Pacific stocks down 3.6% and US Gulf Coast down 84%! Another supportive signal from the weekly global crude in floating storage estimate is a large buildup of supply in the Middle East as supplies back up from the terrorist threat in the Red Sea. On the other hand, we expect this week’s EIA report will show US production returning to record levels from the severe cold disruptions, and with nearly 20% of US refinery capacity idled, we suspect EIA crude oil stocks will continue to build. However, in a strange anomaly, a pattern of four straight weekly builds in EIA crude storage has resulted in an expansion of the year-over-year deficit to 36 million barrels.
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