Written Commentary
Price Overview
The petroleum complex traded on the defensive as concerns continued to mount over global economic growth amid the spread of virus variants and unequal access to vaccines. Despite the concerns, large drawdown in US inventory levels supported nearby contracts on pullbacks as fear of developing tightness offset concerns over OPEC+ and their lack of progress toward resolving the impasse between Saudi Arabia and the UAE. Ideas that the difficulties might be a precursor to a more liberal production policy and a breakdown in the current agreement remained in the background as a negative influence, even though the status quo will lead to a tightening in supplies over the short term.
The possibility of further inventory declines in gasoline and crude will be a key gauge for the market this week. Current estimates point to a draw of 4.3 mb in crude and 1.7 in gasoline, while distillates are expected to build by 1.3 mb. Refinery utilization is estimated to gain .4 to 92.2 percent.
The decline in inventories to a more normal range remains a source of support to the market. Nevertheless, the pace of the global economic recovery will be a key consideration along with OPEC output levels. Demands by the UAE to get a higher baseline will remain a source of uncertainty along with the progress of negotiations with Iran.
For now, it looks like support near 70.00 basis August crude should hold, while resistance in the 75.00-75.50 range could be formidable. Further declines in DOE stocks next week could lead to a retest of the 76.98 high.
Natural Gas
The market managed to find good buying interest again today despite a lack of fundamental support. The August contract ended the session with a gain of 7.5 cents to 3.749, which marks a new high settlement. Weather reports came out of the weekend with further downward revisions in the 15 day outlook, which continued the lower trend to revisions that started last week and has erased a large portion of the above normal temperatures that had been expected through the end of July. LNG flows have also pulled back recently, with Cameron undergoing maintenance and Freeport experiencing an emission event this weekend that temporarily slowed loadings. Despite the bumpy road, exports continue to offer support to the market as overseas prices remain elevated and stock levels in Europe have yet to be replenished. This likely keeps US exports humming at maximum capacity once their internal issues can be remedied. The market may still be drafting support from the extremely low storage build on Thursday, with this weeks number likely to come in near the 5 year average of 54 bcf. With the firmer action today, fund buying likely provided much of the support as the highs near 3.80 are back in sight. If temperatures can swing back to a warmer trend, further managed money interest could be lured in with a move through the highs, leading to a test the 4.00 level in the coming weeks. Initial support now rests just under 3.60, while the 3.49 level would likely hold up to a stronger selloff.
Charts Courtesy of DTN Prophet X, EIA, Reuters
The authors of this piece do currently maintain positions in the commodities mentioned within this report.
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