ENERGY: It is All About Risk On or Risk Off From CPI Today
Take a Free Trial of our Daily Comments, Weekly Market Letter and more! Subscribe today or Learn More
Crude Oil
With a technical breakout in May crude oil to the highest level since January 27th in the early trade today, the energy complex continues to anticipate ongoing improvement in global energy demand. Furthermore, even though May crude oil damaged its charts early in the Tuesday US trade, an aggressive rejection of the sub-$80.00 level erases bearish chart signals. Yesterday, the EIA released their latest Short-Term energy Outlook with expectations of a reduction in world oil demand growth of 44,000 barrels per day leaving a year-over-year increase of 1.44 million barrels per day in place. Unfortunately for the bull camp, the EIA projected US oil production to increase this year to 12.5 million barrels per day versus last month's forecast! This week's Reuters poll projects EIA crude oil inventories to decline by 1.3 million barrels which combined with reports of a significant increase in commercial long positioning should leave energy prices with some internal fundamental support into the ultra-critical US CPI report later this morning. The API survey showed that US crude oil stocks rose by only 377,000 barrels which contrasted with trade forecasts calling for a moderate weekly decline. While a bigger negative for the products than crude oil, headlines this week are rife with evidence of Russian diesel exports surging to the Middle East (Iran), Brazil, China, and Europe. The bull camp should garner some support from strength in Middle East oil grades yesterday especially after the largest Middle East oil companies indicated they would supply full volumes to customers in Asia this month. From a technical perspective, yesterday's impressive recovery showed a slight pick-up in trading activity and perhaps that is a precursor to a more significant pickup in trading activity after today's US CPI report. In fact, as indicated in other market coverage this morning a soft US CPI reading today could spark a risk on/euphoria day which should project crude oil prices toward $82.50. Obvious support in May crude oil today is $79.37 and then down at $79.00.
Product Markets
It goes without saying that today's US CPI report will have a significant impact on gasoline prices later today and possibly over the coming weeks. In other words, the gasoline market into the high yesterday was $0.50 above the mid-March lows insinuating the factoring in an "improvement" in gasoline demand. It should be noted that US implied gasoline demand has improved every week since the end of February and is currently running significantly above year ago levels. In fact, US implied gasoline demand has posted above 9.0 million barrels per day for the last 2 weeks, with 9 million barrels per day readings typically a consumption level seen within the main summer driving season! The gasoline market clearly outperformed the crude oil market yesterday with a very definitive range up extension. However, the bull camp should be aware that recent road congestion readings from China reversed a string of increased congestion readings with a lower week over week measurement. This week's Reuters poll projects EIA gasoline stocks to decline by 1.5 million barrels which might be offset by forecast for a 0.7% increase in the EIA refinery run rate. The API survey showed that US gasoline stocks had a weekly increase of 450,000 barrels which contrasted with market expectations for a moderate weekly decline. Given the gains in gasoline prices off the early March lows, the market is likely to be the most sensitive energy complex market to US inflation readings later today. In other words, a hot inflation reading from the US probably stokes future demand fears from the need to tighten rates further in the US whereas a soft inflation reading could dramatically improve gasoline demand expectations. Critical support in May gasoline today is $2.7840. In addition to EIA distillate and diesel stocks holding year-over-year deficit readings, the headlines this week have been rife with evidence of aggressive Russian shipments of diesel to the Middle East (primarily Iran) but also Europe, and Brazil. The API survey said that US distillate stocks had a weekly decline of 1.98 million barrels which was a larger decline than trade forecasts. Therefore, without a definitive "risk on" take away from the US inflation readings, diesel looks to be vulnerable. We project downtrend channel resistance in the May diesel contract today at $2.7150 and support at $2.6092.
Natural Gas
With the EPA releasing stringent tailpipe emission reduction rules for auto manufacturers overnight the push toward greater reliance on electric vehicles should intensify which in turn will increase demand from the US electric grid. Furthermore, with the US deriving 31% of its power from natural gas and 17% of its power from coal fired utilities, demand for natural gas should continue to expand and in turn that could be a key psychological bottoming anecdotal headline. As expected, US export demand posted a new daily record yesterday, but that supportive development was offset by lower 48 state gas demand posting a decline of 6% versus this week last year. However, US gas flows to export terminals increased by nearly 6% on a week over week basis, and that combined with an improvement in economic expectations could turn up pressure on a very large net spec and fund short positioning. Unfortunately for the bull camp, the EIA indicated US natural gas output should hit a new record this fall of 100.9 BCF per day. This week's Reuters poll projects EIA natural gas in working storage to post an injection between 35 BCF and 24 BCF, and that probably ends the official withdrawal season. Traders should note that open interest in natural gas remains extremely high in what could signal an upcoming trend decision junction. While the reasons to attack natural gas from the short side remain in place, the story has become a bit stale and record daily LNG exports should increase the risk of fresh shorts at historic low levels on the charts. We are not prepared to recommend long positions in natural gas, but we are prepared to advise against short positions.
Today’s Market Ideas
Obviously, the bull camp needs inflation to moderate for economic optimism to expand and inflate future energy demand expectations further. On the other hand, this week's EIA weekly report will be released with all major inventory levels holding deficits relative to year ago levels and gasoline demand readings showing a very positive trend.