Morning Energy: Macro Influences Rekindled Bullish Sentiment Towards Petroleum
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CRUDE OIL MARKET FUNDAMENTALS
We are surprised with the strength of crude oil prices in the early action today, as reports have a slight rebound in production from Libya and Kazakhstan. However, the trade is attributing the rally this morning to strength in US equities, weakness in the US dollar and perhaps because of news that China in 2021 consumed a record amount of sanctioned oil from Iran and Venezuela. In other words, total consumption from China is likely better than expected when the illegal (in the minds of the US and others) barrels consumed are added to the legal barrels consumed. On the other hand, it is possible that prices are drafting lift from expectations of another decline in weekly EIA crude oil inventories. Fortunately for the bull camp, this week's Reuters poll projects EIA crude oil stocks to post a 7th straight week of declines on the order of 2-million barrels. The Reuters poll suggesting US crude oil stocks will decline by 2-million barrels would match last week's draw and likely leave the year-over-year deficit around 67-million barrels. Obviously, yesterday's weakness was largely the result of a risk off trading session largely fostered by significant weakness in US equities and therefore the US Federal Reserve testimony later this morning is likely to have a noted impact on energy prices. However, China has more than 20-million people lock down due to Covid isolation and that should undermine Chinese energy demand views. A portion of demand fears were moderated yesterday following news that Spain's November crude oil imports were up by 19% versus year ago levels. From a technical perspective, the February crude oil contract has rejected yesterday's closing level of $78.23 and should manage another trade above $80.00 today.
PRODUCT MARKET FUNDAMENTALS
Like the crude oil market, the gasoline market this morning has definitively rejected the prior closing level of $2.2754 and that level becomes a key pivot point during today's session. Surprisingly, a massive 1.3 million US infection count from Monday has not undermined gasoline despite the likelihood of a reduction in public interaction/travel. However, a minor refinery outage combined with very positive early US equity market action provides fresh bullish buzz to start today. Uptrend channel support today is seen at $2.2795, and resistance is obviously last week's high of $2.3338. Unfortunately for the bull camp, the gasoline market is likely to be undermined because of tanker tracking news highlighting gasoline tankers moving toward the US. In fact, the research arm of Reuters is projecting 110,000 tonnes of exports of Northwest European gas will arrive at the US this week. Furthermore, the most recent ARA gasoline inventory reading showed a gain of 10%. Therefore, supply developments are bearish and demand developments are also tracking bearish. This week's Reuters poll projects gasoline stocks to increase by 2.5 million barrels and projects the US refinery operating rate to decline by 0.4%. While US temperatures showed some significant cold weather in some regions of the US recently and some forecasts have cold filtering back in after January 15th, overall US heating degree days remain below normal in most areas. This week's Reuters poll projects EIA distillate stocks to increase by 1.5 million barrels. As in the gasoline market, we doubt the diesel market is poised for a normal retracement of the December/January rally with a dip back to $2.3230. To see a full retracement in ULSD would probably require significant declines in equities and news of additional city lockdowns in China and or surprise builds in EIA gasoline and distillate stocks.
NATURAL GAS
In retrospect, the sharp gap higher range up action on Monday was attributable to extreme cold in the Midwest and Eastern seaboard of the US. In other words, the natural gas market remains sensitive to temperatures that could rekindle fear of tight US winter supplies. Certainly, US heating degree days remain below normal but have started to "catch up". On the other hand, gas prices in Europe continue to soften with UK wholesale April gas prices reportedly falling by 5.9%. In addition to mild temperatures, European gas weakness is attributable to fresh supply arriving in Europe via tanker especially with some terminals operating at the highest level since December 2019. Fortunately for the bull camp, Bloomberg overnight suggested floating LNG supply declined by 13% on a week over week basis and has now reached the lowest level since October 23rd of 2021. From a technical perspective, February natural gas managed to respect support at $4.00 on a close basis yesterday and is garnering support from that level early today. Certainly, the natural gas market is facing slackening demand fears from the macroeconomic condition, but supply issues should be capable of supporting prices as Russian supply continues to be held up from Europe. Unfortunately for the bull camp, temperature forecast in the US out to January 17th show only a quarter of the US experiencing cold temperatures. This week's Reuters poll projects natural gas storage to decline by 147 bcf to 186 BCF. While the natural gas market fell back after an impressive gap opening yesterday, we see prices underpinned if Russia continues to allow supply flow from west to east. In the near term we see a critical pivot point at the bottom of yesterday's gap at $3.98 and a key failure seen with a trade below $3.964. On the other hand, a trade back above $4.1440 could signal a quick pulse up to a previous high of $4.21.
TODAY'S MARKET IDEAS
Apparently, the energy markets have "thrown off" the corrective track in yesterday's action, with crude and gasoline spending the entire overnight trade above yesterday's closes. Fortunately for the bull camp, the markets are being lifted by strong equity market action early today, a weaker US dollar and by expectations for a 7th straight weekly decline in EIA crude oil stocks. Close in support in February gasoline is seen at $2.2921 and then again down at $2.2611. Near term upside targeting in ULSD is $2.55 and support moves up to $2.4753. Uptrend channel support in February crude oil is $77.83 and resistance is at $80.47.