Written Commentary
CRUDE OIL
With a significant downside extension this morning in crude oil taking place in the face of fresh chatter of the potential for an EU ban of Russian oil the bear camp has clearly gained the upper hand. Unfortunately for the bull camp current expectations have an EU ban “by the end of the year” and that timing is disappointing to the bull camp. Not surprisingly, a major argument for the bear camp is the prospect of further Chinese lockdowns as China continues to manage its Covid flare very aggressively. However, it should be noted that press reports suggest the number of daily infections measured in key cities only number in the low hundreds and not in thousands.
While the gasoline market fell back from its highs on Friday like crude oil, the reversal was less severe than in crude oil. However, the action from last Friday is resulting in catch up selling today. In our opinion, the fundamentals in gasoline are stronger than crude oil with the US refinery operating rate relatively low for a tight supply environment. However, northern hemisphere seasonal demand should post only incremental gains over the next two weeks. In a negative demand development, the allowance of high ethanol content use gasoline mixes has been officially sanctioned for the US this summer and that could temper tightness in gasoline stocks. From a supply perspective, the gasoline inventories in the US remain at a 4.2-million-barrel deficit and are significantly below the 5-year average for this time of the year.
NATURAL GAS
While the natural gas contract extended the downside trend last Friday, prices recovered/rejected that washout possibly in a short covering pre-weekend trade. Furthermore, tight inventory fears have surfaced again this morning, colder than usual weather for the US Northwest and Northeast next week has been noted and with the latest positioning report still showing a net spec and fund short, the bounce is justified by several factors. Unfortunately for the bull camp, supportive US weather is countervailed by mild and therefore negative European temperatures. As of the most recent and suspect reports, Russian gas continued to flow westward but has not been consistent for the last three weeks.
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