Tuesday, July 10, 2012

CME Group Crude Oil, Natural Gas and Gold Market Recap for Tuesday July 10th

August crude oil prices trended lower throughout the session marking the lows of the day into the pit close. Early pressure in the crude oil market came from a resolution to the oil workers' strike in Norway and from weaker than expected Chinese oil import data for the month of June. The global oil demand story came under greater scrutiny following the EIA's monthly report that showed another downward revision in 2012 global oil demand. The agency sited lower economic growth forecasts. Another source of weakness in the crude oil market came from an afternoon sell off in US equity markets and gains in the US dollar. Expectations for this week's EIA crude oil stocks report are for a draw in the range of 1.25 to 1.50 million barrels.

Natural gas remains on a bit of a roller coaster ride... big decline on Friday, strong recovery on Monday and yet another sell off today. This type of trading action is very indicative of a market forming a top as well as a market that is laden with uncertainty. The main uncertainty that continues to hover over this market is will the rest of the summer weather result in enough cooling related demand to prevent the industry from hitting storage capacity limitations prematurely.

The EIA in the latest forecast (see below for the main highlights) is projecting inventory at the end of October to hit a record high of 4 TCF. With maximum storage capacity of just 4.1 TCF (EIA numbers) that leaves just 100 BCF storage space available for injections during the month of November... which are common...especially if winter type weather gets a late start. This also assumes that storage capacity is equally distributed in all three regions...which it is not. We could hit capacity limitation in the Producing region well before other regions.

The other issue overhanging this market is what will be the strategy of the utility sector in how much coal versus Nat Gas they consume for power generation. At current prices the economics are favorable to coal and I would expect utilities to burn more coal in lieu of Nat Gas and unless the Nat Gas price falls back to below the $2.70 to $2.75 level this move back to coal will continue. If so hitting record high inventory levels could then occur earlier than the EIA projection of the end of October.

After an early attempt to rally gold prices fell back and in the process the August gold fell back to this week's lows. Adverse currency market action, a noted reversal in equities and selling in a number of physical commodity markets seemed to leave gold in a patently bearish posture. Surprisingly gold was initially lifted on hopes for favorable progression in the Euro zone debt crisis but that story line ultimately seemed to be responsible for the washout in gold prices. In retrospect, seeing evidence of added weakness in the Chinese economy, in the wake of the Chinese trade deficit released seemed to spark fears that more serious slowing was in the offing before the Chinese begin to pull out the really aggressive stimulus guns.

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