Written Commentary
CRUDE OIL
While many markets are beginning to suffer thinning trading volumes due to the approach of the coming holiday, the crude oil market appears to have lost bullish interest because hope for falling rates and better energy demand are becoming stale bullish catalysts. In fact, premium interjected into crude prices because of terrorist attacks in the Red Sea is being discounted as a significant threat and that highlights a shift to bearish headline shaping by the trade. In a surprise bearish development US shale producers have surprisingly boosted production by focusing on what Bloomberg labeled as easy, quick turnaround predrilled wells. However, the supply of predrilled holes has declined to the lowest on record and that could result in a sharp drop in production in the future. News that Russian Pres. Putin has banned the sale of Russian oil to countries observing the Price-Cap is not a direct supportive development but instead is merely a complication for Russian supplies flowing to the global market. While we suspect improved energy demand views are surfacing in the wake of the ongoing pattern of new highs in equities, lower Saudi October production news combined with this week’s Reuters poll projecting a 2.2-million-barrel decline in EIA crude oil stocks should have supported prices better yesterday afternoon. In a longer-term bearish development, a survey released yesterday predicts Chinese demand “growth” will slow sharply next year and given evidence of a soft economy in China from regularly scheduled data, narrowing Chinese consumption is not an insignificant development.
NATURAL GAS
In retrospect, the aggressive rally off the recent low in gas was probably a function of year end profit-taking by long-held shorts, and from expectations of record Chinese electricity use from cold weather. In fact, the Chinese government has indicated they will secure the supply necessary to provide for historic electricity needs in the country and that alone likely fostered a wave of shorts to bank profits and move to the sidelines. This week’s Reuters poll projects EIA gas in working storage to decline by 70 to 75 bcf and given a year over year and five-year average stocks surplus, “triple digit” weekly withdrawals are needed to remove a dominating bearish supply view in the market. However, the bull camp has become a little bit more sensitive to bullish developments following record flows to US LNG export plants, and surprisingly by talk of improved seasonal demand. Apparently, US LNG terminals are pulling in 15 bcf/day with that rate expected to continue, and that combined with any lengthy cold snap could change the complexion of the natural gas market.
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