Written Commentary
CRUDE OIL
While there does not appear to be a definitive toning down of tensions in the Middle East, a slowing of US attacks has prompted “hope” that another cease-fire/peace deal could be in the offing. However, Iran has indicated there are no talks underway despite rising pressure from its Middle East neighbors. While the markets have been fooled many times over the last year, huge outflows from the United States Oil Fund (the biggest outflow since April) last week suggest the trade is seeing an end to the conflict or is becoming insensitive to the story line. Other structural signs of a shift lower in prices is seen from time spreads falling sharply and the NYMEX gasoline crack falling to the lowest level since June 17th. Furthermore, Crude oil has pivoted sharply to the downside and has fallen more than $13 a barrel below its mid-July high. While the market is likely to maintain whipsaw price action, crude oil is reflecting a significant reduction in risk premium.
PRODUCTS
Not surprisingly, the gasoline market has followed crude down this morning with a “gap-lower” trade and the lowest trade since July 14th. While it may be premature, it should be noted that EIA gasoline inventories have posted positive inflows over the last two weeks (although very minimal) but that breaks a chain of four straight weeks of contraction. In fact, it appears that the 210 million barrel inventory level may be some form of structural low for EIA gasoline inventories. On the other hand, seasonal patterns show EIA gasoline inventories continue to decline into early November! However, seeing the gasoline crack fall to the lowest level in 46 days could highlight a shift away from bullish fundamentals and could be a sign of waning summer demand expectations.
NATURAL GAS
While the natural gas market failed after an extended sideways consolidation pattern last month, the market appears to be attempting to rebuild another slightly lower sideways trading range. However, open interest has risen consistently since the September contract fell below the $2.80 level, suggesting the potential for some form of a low has been found. However, picking a “low” in the natural gas market is fraught with peril considering the potential for the release of a wall of oil/gas supply if the Strait of Hormuz were to be fully and consistently opened. Nonetheless, European gas storage levels hit an 18 year seasonal low last week with inventories at only 57.1% full compared to five-year average of 74% full.
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