Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex traded in a choppy fashion to settle mixed with crude and gasoline registering modest gains while ULSD showed losses on economic concerns and a pick-up in refining activity. The complex continues to look to China and the US for direction on demand trends with the lowering of some Chinese interest rates and further weakness in the US equity markets helping to keep concern over economic prospects in focus. In addition, reports of increased sales of Russian oil into China, displacing Iranian crude, was also a background consideration. The appearance that Russian availability is holding up better than forecast this month combined with ideas that a full embargo of Russian oil by Europe might not occur in favor of the placement of retaliatory tariffs also helped undermine sentiment and limit buying interest.
Comments by Russian Deputy Prime Minister Novak indicating that Moscow would send any oil rejected by European countries to Asia and other regions might become more of a talking point on availability. He indicated yesterday that their production had fallen by 1 mb/d in April but had increased by 200-300 tb/d in May with higher volumes expected in June. Although we are skeptical of the specifics, Chinese import levels of Russian crude have increased dramatically. Reports suggest that exports of Urals crude tripled in April as refiners take advantage of large discounts. The increases, due to attractive discounts, have also been noted in other countries such as the UAE and India, which to some extent helped alleviate the pressure on Russia from sanctions by major Western powers. The increasing Chinese reliance on Russia for crude supplies has come at the expense of the Iranians as oil in floating storage in Asia has risen sharply. Although talks between Russia and Iran are underway on how to evade sanctions, the financial pressure is building on Iran, which might encourage more intense discussions with the West over lifting sanctions.
Although fears persist over global supply availability and low inventories, it appears that uncertainty over China’s economy along with demand destruction, particularly in Europe, might ease these concerns for now and limit movement above 115 in July crude, while support is still likely on sharp pullbacks to the 102-104 level.
Natural Gas
Prices retrenched over the last two sessions as the July contract tested the 8 dollar level both days but managed to reject that area, settling with a loss of 22 cents today at 8.178. Yesterday’s storage report showed a build of 89 bcf, which was slightly above estimates. The market rallied after the release but gave back most of those gains by last nights reopen. Downward revisions to temperatures in the 15 day forecasts along with an uptick in production above 95 bcf added pressure to the end of week profit taking dip. the Baker Hughes rig count showed a gain of 13 oil and 1 gas rig. This supported the existing expectations for crude production to steadily increase and the associated gas that goes along with it. Despite the fundamental negatives th market managed to push higher late in the session. LNG flows played into the support, steadily returning from maintenance to revisit the 13 bcf/d level. The path of least resistance continues to be higher, with initial resistance just above 8.60 basis July that likely doesn’t reign in a test of the highs near 9.00. Substantial support remains at the 8 dollar level on a settlement basis, but a push below there could lead to rapid declines similar to what we saw early in the month.
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