Written Commentary
CRUDE OIL
What we have early today is a technical bounce within a fundamental based downtrend. While US recession fears remain a key bearish force, the potential for lockdowns in Shanghai to contain infections keeps the overall outlook for energy demand bearish. In fact, crude oil prices in Shanghai closed lower and the Chinese government expects to complete its mass testing of 25 million people tonight! There is an adage in trading advising against attempting to catch a falling knife, and the current situation is a perfect analogy. In fact, classic supply fundamentals are unlikely to have a sustained impact on prices as the fear of energy demand destruction flowing from widely entrenched recession expectations keeps would be buyers on the sidelines.
With the passing of the peak seasonal gasoline demand window in North America, the refinery operating rate running near 3-year highs, consumers thought to be avoiding trips, two straight weeks of EIA gasoline stock builds and weekly implied gasoline demand possibly already peaked at a historically low seasonal level of 9.1 million barrels per day, the bear camp has plenty of internal fundamental ammunition. It goes without saying that demand destruction sentiment is in control of the market and is likely to remain in control of the market until there is a change in overall global macroeconomic sentiment. In fact, the energy markets have probably not factored in another lockdown in China but given China’s zero tolerance Covid policy, the potential for a reduction in Chinese energy demand ahead should not be discounted.
NATURAL GAS
Fortunately for the bull camp, strong US cooling demand prospects remain in place (despite diverse temperatures in the US) and the threat against sharp declines in cyclical gas demand are not as direct as in the petroleum complex. Also supporting gas prices is news that Russian gas exports are projected at only 4.7 bcf/day this month which compares to 6.5 bcf/day in June and 9.4 bcf/day in July last year. The biggest decline in Russian gas flows came from the Nord Stream pipelines which are running at 40% of their capacity.
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