Energy Commentary: The Path of Least Resistance Remains Down
Take a Free Trial of our Daily Comments, Weekly Market Letter and more! Subscribe today or Learn More
CRUDE OIL
While the crude oil market has managed to hold near yesterday’s close and above yesterday’s spike low, the bear camp should feel confident following overnight news from the Ukraine situation. Apparently global equity markets are rallying off Kremlin comments suggesting Ukraine could maintain its military in the event certain conditions are met. Certainly, the international community will not quickly unwind Russian energy export limitations but given the massive slide in prices and the return to late February prices, a significant amount of the “war premium” has already been extracted from prices. On the other hand, demand fears remain in place from the Chinese situation and API crude oil stocks yesterday afternoon increased by 3.7 million barrels. However, global demand might recover or might have remained strong during the war as evidenced by a Bloomberg story overnight indicating less than expected demand destruction in Europe. Unfortunately for the bull camp, the prospect of energy demand falling in China from progressive lockdowns, could become “the” dominating force for energy prices especially if the Ukraine situation becomes less incendiary. Furthermore, with a significant range down extension in crude oil yesterday putting the 6-day high to low slide at $34.00, the overbought net spec and fund long position into the March high should be moderated. The markets should draft some support from news of a possible Canadian Pacific rail strike in Canada as that could restrict flow into the US. From a technical perspective, the slide from the early March high has been forged on declining trading volume and open interest and that could suggest a slowing of selling interest. While the May crude oil contract appears to have found psychological support at the $95.00 level, the market might need a decline to $90 to fully remove the entire war premium from prices. This week's Reuters poll projects EIA crude oil stocks to fall by 1.4 million barrels and for the US refinery operating rate to increase by 0.3%. After the close, the API survey showed US crude oil rose had a weekly increase of 3.754 million barrels which was in sharp contrast to trade forecasts for a moderate weekly decline.
PRODUCT MARKETS
Like the crude oil market, the May gasoline contract yesterday seemed to find some value at the $3.00 level. However, expectations for retail gas demand are plunging around the world because of high prices and without widespread local tax relief, demand is likely to contract. Furthermore, with the May gasoline contract from the March high declining by $0.94, the net spec and fund long in gasoline should have been brought down significantly and therefore additional stop loss selling should moderate soon. Nonetheless, the path of least resistance is down unless May RBOB manages a recovery back above $3.3238. This week's Reuters poll projects gasoline stocks at the EIA to decline by 1.6 million barrels. The API survey showed US gasoline stocks had a weekly decline of 3.794 million barrels which was a larger decline than market expectations. The charts in the diesel market are the most bearish in the energy complex, and that combined with reports that US airlines were moving to cut capacity because of surging fuel costs, dents demand expectations and leaves the bear camp confident. In fact, the ULSD market has been unable to respect $3.00 and without several closes back above that level, we leave the technical edge with the bear camp. This week's Reuters poll projects distillate stocks to decline by 1.8 million barrels. The API survey showed US distillate stocks had a weekly decline of 888,000 barrels which was a smaller decline than trade forecasts.
PETROLEUM MARKET IDEAS
While we think the markets are close to equilibrium values, Chinese demand fears and a continued flow of pre-sanctioned Russian oil supplies have left the bear camp in control. However, we suspect energy markets have overreacted on the downside and have understated the eventual shortage of supply from wide scale energy sanctions against Russia. Certainly, it is possible the markets could see a relief rally off growing hope for a compromise on the Ukraine front, as sanctions limiting Russian energy supply flows are unlikely to be removed quickly. Furthermore, a significant amount of war premium has been removed with the 6-day historical washout.
NATURAL GAS
In addition to mild weather, the natural gas market this week has been undermined by fears of slumping Chinese demand from what is expected to be even more activity restrictions. In another negative, daily LNG storage at US export terminals jumped by 17% over the prior day and that on its face hints at excess supply. On the other hand, to see aggressive US LNG exports requires large supplies in export position! The big question for the bull camp is, will Russia agree to a cease-fire and allow Ukraine to remain sovereign, as that could result in a resumption of gas flows to the west? However, gas prices should be supported because of news that natural gas flow in the Yamal-Europe gas pipeline remains eastward. In a positive longer-term demand story floated yesterday EU leadership called for "a quick refilling" of gas storage for next winter and that brings demand forward. This week's Reuters poll project weekly EIA gas storage to decline by 53 to 87 bcf. We see solid value at $4.50, but that level is unlikely to hold if the omicron situation in China results a reduction of Chinese LNG imports. On the other hand, the latest net spec and fund short in natural gas was large at 97,196 contracts, and the prospect of stop loss buying on Ukraine euphoria could be seen ahead.
