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Natural Gas Rally Reverses

NATURAL GAS

With a gap down failure this morning the recent rally has been reversed and prices are likely headed back to the mid-August low down at $3.216. We have been very skeptical of the recent rally in natural gas as a shift to cooler temperatures this early in the season does not signal the potential for strong early heating demand. However, some buyers are possibly concerned of major Middle East supply interruptions which could spill over into natural gas. In fact, with the 2023 net spec and fund short peak in natural gas 142,000 contracts and last week’s 51,000 contract net short, bearish sentiment in natural gas is moderating. With the post COT report rally of $0.32 it is possible that natural gas has seen the smallest net spec and fund short since March of 2021.

CRUDE OIL

The bull camp should be disappointed with the lower price action in the wake of the launch of the Israeli ground attack of Gaza. While we give the edge to the bull camp, action at the end of last week also showed a lack of bullish resiliency with a war unfolding in the Middle East. In fact, with the launch of the Israeli ground attack, we suspect Arab relations with the West will deteriorate, potentially producing threats of not selling oil to those supporting Israel. Perhaps even more likely is an Iranian attack of oil tankers in the Gulf of Hormuz. With Iranian leadership last week making it clear that the US would not be exempt from retaliation, the escalation of the war could take many unexpected turns. Other negative developments overnight included evidence of higher Canadian oil sands production and recent oil patch earnings reports detailing sharp and ongoing declines in investment in the development of future fossil fuel supply.

 

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