Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex continues to attract good support as July WTI reached new contract highs today of 123.18. Growing concerns over refinery capacity along with ongoing concerns that OPEC’s sustainable production capacity is limited continues to underpin values. Additional support also emanated on the appearance that China is easing COVID lock-downs along with a potential strike action by Norwegian oil workers beginning June 12 over pay that has potential to cut crude output. The concerns helped offset the impact of the DOE report which showed a build in both commercial crude and product inventories. In addition, revisions downward in economic growth forecasts by the World Bank also failed to adversely effect values as the market continues to focus on the various supply constraints which has limited any rebuilding of historically tight inventories both in the US and globally.
The DOE report showed commercial crude inventories building by 2 mb with 7.3 mb being drawn from the Strategic Petroleum Reserve and leaving an overall deficit of 5.2 mb. Fears that these SPR inventories will need to be replenished continues to underlie bullish sentiment along with the slow growth in US crude production which has stagnated recently near 11.9 mb/d. The build in inventories was also prompted by a sharp decline in crude export levels which fell to 2.2 mb/d from 4.0 mb last week and an average of 3.5 mb/d in the prior four weeks. In products, inventories built in distillate by 2.6 mb as record high 2 oil margins encouraged output of middle distillates while gasoline saw a modest reduction of .8 mb. Total disappearance rates were reported at 20.2 mb compared to 19.5 in the prior week. Gasoline product supplied reached 20.2 mb compared to 19.5 in the prior week and 19.8 mb last year while distillate supplied pulled back to 3.7 mb from 4.0 mb in the prior week. Net imports of .7 mb/d reversed the trend of net imports in recent weeks.
Today’s decisive move above the 120.00 level suggests the potential for further upside movement in crude is likely as high refinery utilization and limited movement by OPEC to expand production more quickly continues to support fears supplies might grow even tighter. Until there is a more definitive sign demand has been throttled back, breaks much below the 115-116 level in prompt crude are unlikely and potential for a move toward the 130.00 area appears possible.
Natural Gas
The market reversed sharply from sharp early gains to sharp losses following reports of an explosion at Freeport LNG at midday. Additional details were lacking but the facility produces about 2 bcf./d of LNG. The prospect that additional supplies might be available to the domestic market if the facility was badly damaged appeared to lead to active long liquidation and stop loss selling that took values down from a high of 9.66 basis July recorded in the morning to a low of 8.447 and a settlement 8.699 for a loss of 60 cents on the day. Export levels from the plant will remain a key consideration given that these supplies would be a welcome addition to the domestic market as a source of additional supply. Until more facts are forthcoming, it is difficult to make an assessment of how deep the decline will be given how overbought the market is and the prospect that tightness will reassert itself as we move toward winter and demand remains buoyant. Fears that storage levels going into winter will be extremely low continues to be a source of concern. Currently, US inventories are 15 percent below their five year norm for this time of year. It is interesting to note that these levels are below those in Europe which are 9 percent below the five year average and where prices are substantially higher. For tomorrow, the EIA report is seen showing an injection of 96 bcf. With the temperature outlook pointing to above normal temps for the Eastern US and most of Texas we suspect that the decline might be short lived and support should develop in the 8.00-8.30 area basis July if support against the 20 day moving average in July at 8.50 is violated.
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