Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
Risk on and risk off seems to be the name of the game in the petroleum complex as good buying interest developed overnight on ideas that tightness in availability will persist as sanctions on Russia limit their ability to export crude and products. Ramping up the concerns were reports that Russian gas flows to Europe via Ukraine had fallen by a quarter today after Kyiv halted the use of a major transit route claiming interference by occupying Russian forces. This was the first time that natural gas exports via Ukraine had been disrupted.
Although concerns persist over the demand repercussions from higher prices and slowing in the global economy, it appears unlikely to lead to a surplus in the second half of the year. Tomorrow’s IEA Monthly report should bring some clarification to how the supply-demand situation is shaping up.
We still believe that supply tightness will continue to be pronounced, with prices having potential to test the 115 area. As seen today, downside pressure past the 100.00 area is unlikely based on the following:
- A looming EU embargo on Russian oil
- OPEC+ output restraint amid strained relations with the US
- Passage by the Senate Judiciary Committee of the bipartisan NOPEC bill, which could expose OPEC and partners to lawsuits for price collusion by changing US anti-trust law to revoke sovereign immunity that has protected the cartel in the past
- The plan to buy back 60 mb of crude for the SPR in September following the releases this spring
The DOE report, which showed crude inventories building by 1.5 mb, failed to attract selling interest. Instead, the market focused on the failure of crude inventories to build dramatically despite a record large release of 7 mb from the SPR. The decline in Cushing inventories of .6 mb, the drop in gasoline stocks of 3.6 mb ahead of the peak driving summer months, and a decline in distillate of 1 mb continued to keep the focus on low inventories. Strong export levels, with the current week showing net exports of crude and products totaling .7 mb, continues to limit inventory builds. Refinery utilization at 90 percent is falling short given the high current profit margins.
Natural Gas
The market ran out of selling pressure yesterday, but not before testing below the 6.50 level as prices plummeted nearly 2 ½ dollars over three trading sessions. The recovery was ignited when Ukraine issued a force majeure on some pipelines in the Eastern portion of the country on land occupied by Russian forces. The stoppages decreased Russian gas flows into Europe by approximately 25 percent yesterday. On the domestic front, improving output, which neared 96 bcf/d over the weekend, has failed to follow through as production slipped back under 95 bcf at mid-week. Extremely high temperatures in Texas, with record heat for this time of year, have rekindled concern regarding a hot summer and added to the whipsaw reaction. The rejection of sub-6.50 prices makes that level considerable support on a settlement basis. The quick bounce has retraced 50 percent of the equally rapid break, with 7.82 the next area of resistance, with 8 dollars beyond that as a likely target if momentum is maintained.
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.
