Written Commentary
CRUDE OIL
In retrospect, the brunt of this week’s internal fundamental news flow has been bearish to energy prices. To summarize, the trade sees softening demand as a bigger force than recent supply developments. Furthermore, aggressive selling interest toward physical commodities lurks in the background with fear of a Chinese lockdown and potential softening of the jobs market likely discouraging buyers at this week’s highs. In fact, with crude oil prices early today trading $7.70 above this week’s lows, the risk to longs from the charts is significant. While it is possible that this week’s low in August crude at the $95.00 level is an intermediate (key) low, it is risky to discount the potential for a sudden return of energy demand destruction selling. The most likely source of a return of demand destruction fear is news of fresh quarantines in Shanghai.
While all product inventories contracted in the EIA report, the most supportive development was a surprising jump in weekly implied distillate demand to the highest level of the year at 9.4 million barrels per day. Unfortunately for the bull camp, the current implied demand reading remains almost 1% below year ago levels! If seasonal demand begins to soften, the high refinery operating rate should consistently discourage fresh buying and should eventually encourage fresh selling. However, weekly gasoline stocks did decline by more than expected, but we attribute that to concentrated preholiday driving.
NATURAL GAS
While rumors of an impending shutdown of Russian gas pipeline flow to Europe have been present from the first days of the Russian incursion, chatter on that subject appears to have increased in frequency and number of sources this week. Yesterday, the markets were presented with evidence of slower Russian gas exports and the Russian court ruling to shut down the Caspian pipeline makes it clear that supply threats will continue to lurk in the marketplace. Unfortunately for the bull camp, a smaller than expected injection of 60 BCF was offset by a narrowing of the current inventory deficit to the 5-year average.
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