Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil settled modestly higher at 78.48 despite sketchy reports that Hamas had accepted a 40-day cease fire that was on their terms. Israel failed to confirm acceptance of the proposal and had warned of an imminent but restrained attack on Rafah. The larger than expected increase by Saudi Arabia of their Official Selling Price to Asia, Northwest Europe and Mediterranean to 2.90 above the Oman/Dubai average in June also encouraged buying interest. In the background were reports the Caixin/S&P PMI for China remained in expansionary levels of 52.5 in April but did not signal a robust revival in economic activity due to property sector woes.
The political risk premium is highly uncertain given statements by Israel that it planned a limited scope invasion of Rafah and questions over whether Israel will accept the cease fire agreement as presented by Hamas. At this point it is doubtful that Israel will accept the proposal as presented. How this plays out remains uncertain but heightened geopolitical risk remains on the table.
Although the rise in tensions will be watched closely, the OPEC+ negotiations on June 1st regarding the extension of voluntary cuts are also being monitored. The cartel is expected to rollover the cuts due to the fact that supplies have not tightened appreciably since the beginning of the year and on uncertainty over demand growth. The declining market share of group members amid production increases from non-OPEC producers might be a point of contention.
Natural Gas
Upside momentum was maintained as the week kicked off, with the June contract adding 5.3 cents to end the day at 2.195. Freeport’s return continued to take the headlines, as flows reached above 1.4 bcf over the weekend and signaled that a second train was coming online. The large fund short position has also played into the recent rally by exacerbating the move as the market runs through stop levels. In the background was warming in the forecasts and lower production to excite the bulls. With long term forecasts hinting at a hot summer, any early signs of heat will draw out optimists. The 100-day moving average near 2.25 was tested today but held resistance. A push above there would target the early March highs near 2.40. Late weakness could signal a near term exhaustion of the rally, with support in the 2.14-2.15 range and then at the 9 and 20-day moving averages near 2.02.
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