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Natural Gas Lower from Highs

NATURAL GAS

On one hand, the natural gas market managed to hold up against a top of the range weekly inventory injection. On the other hand, the market has not benefited from the threat of lost export supply from Australia (because of a strike) and the market did not benefit from talk yesterday that the Australian strike could be protracted. Furthermore, natural gas has drifted lower from highs earlier in the week despite a forecast for above normal heat in the US next week. Over the last four weeks, natural gas storage has increased 94 bcf. At this point, we see no fundamental justification to take control of natural gas away from the bear camp. Certainly, the prospect of a late season surge in US cooling demand from a return of hot weather next week should help support prices but with a surplus versus the five-year average of 10.8% it would take extreme and sustained heat to shift adequate supply into tight supply.

CRUDE OIL

With a modest risk off environment facing crude oil today, a brokerage forecast of “robust supplies” into the end of this year, ongoing anxiety toward the Chinese economy and a widening of the Russian Urals discount on sales to India the bear camp has several fundamental arguments. Other bearish developments were detailed in a Bloomberg intelligence posting overnight suggesting sagging oil tanker rates are signaling softening Chinese demand, plummeting inflation in China is signaling slowing, surging Asian inventories will now reduce imports to the region, signs of economic slowing in Korea following sharp declines in that country’s overall exports and lastly signs of plummeting global road traffic. However, despite the avalanche of bearish headline developments, the October crude oil contract remains moderately above this week’s lows today. While the ebb and flow of Chinese oil demand is certainly a major force in determining daily crude oil prices, this week the markets saw tightening of US commercial oil inventories with some measures to the lowest levels since January. In retrospect, we think the crude oil recovery yesterday was unrelated to the Chinese liquidity injection, and ultimately, we see liquidity injections as a stopgap or cushion against economic trouble instead of a “stimulus”.

 

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