Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex succumbed to outside market pressure as dollar strength and ongoing weakness to equities attracted selling interest in both crude and products. Concern over the economic prospects for China also remained in the background and helped overshadow Western Europe’s consideration of a phased-in embargo of Russian oil. The concern that it would lead to a sharp contraction in supply was offset by recurring questions over the viability of Chinese demand. Reports that their crude oil imports had grown by 7 percent in April compared to last year were ignored as the market focused on the lockdowns and the impact on refinery throughput, which fell by 6 percent in April. Top refiner Sinopec indicated that since the second half of March it had lowered operational rates to about 85 percent of capacity compared to 92.6 earlier this year following a rise in inventories amid lockdowns. Chinese refined oil exports also fell in April to 3.82 million tonnes, a decline of 44 percent from last year and compared to 4.07 in March. With weakness to Chinese demand, Saudi Arabia lowered its OSP for Arab Light for June to a $4.60 differential, sharply below the $9.35 level set in May, which was a record high
Today’s weakness saw values down nearly 6 percent, which puts WTI crude back toward support near the 100-101 level basis June. Key considerations determining if support will hold will be whether the phased in embargo of Russian oil by the EU is approved, the severity of the Chinese economic crisis, and the prospect for a contraction in Western economies as interest rates rise. A key gauge of how the supply/demand situation is shaping up will be the IEA Monthly Report which is scheduled for release on May 12th.
The DOE report on Wednesday is expected to show crude off 1.2 mb, distillate and gasoline declining by 1.2 and 1.8 mb respectively while refinery utilization is expected up .3 to 88.4 percent.
Natural Gas
The retrenchment that started Friday saw substantial follow-through as prices plummeted over a dollar today to settle at 7.106. The negative tone was maintained as Russian gas continued to flow toward Europe, pushing the European benchmark TTF contract sharply lower and spilling over to US prices. Improving production added downside pressure, with weekend output nearing 96 bcf/d, while across the board weakness in equities and commodities helped to overextend the break. The fundamental picture in the US has not changed drastically over the course of the setback, with storage levels still over 300 bcf below average for this time of year, exports near capacity and likely to improve, and production still below expected levels despite recent improvement. With forecasts suggesting a hot summer, upside risk is still substantial as we exit the shoulder season. With the market retracing 68 percent of the rally since late April, the next area of support looks to be the psychological 7.00 level, which was tested late in today’ session, and below there at the April lows near 6.50. With the upside cleared out over the last week, any swing in momentum could see a quick retest of the 8 dollar area.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The information and comments contained herein is provided by ADMIS and in no way should be construed to be information provided by ADM. The author of this report did not have a financial interest in any of the contracts discussed in this report at the time the report was prepared. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.
