Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex continued to trade in a volatile fashion with crude recovering from sharp early losses of over 3 dollars per barrel to end with a slight gain on the nearby contracts. Products and likewise the cracks showed a strong recovery from the morning lows but still registered losses on the day as fears over possible retrenchment in demand amid high refinery utilization kept prices on the defensive.
The early weakness reflected the ongoing fears over a contraction in economic activity given the Fed stance toward a tighter monetary policy and the possibility for more aggressive action following the meeting of the Federal Reserve that ends Wednesday. The concerns were reflected in sharply lower US equity values which attracted sympathetic selling in the energy complex. Reports of action by Chinese authorities to quell a spike in COVID infections in Beijing also raised concerns new lockdowns might be forthcoming that could adversely affect Chinese economic growth and in turn oil demand.
Despite the negative economic news, selling interest quickly dried up below the 118.00 area basis July as concern over global supplies persisted. OPEC+ is still falling well short of production targets and these supply side fears have recently been magnified by the possible strike action by Norwegian oil workers, the closure of some ports in Libya leading to the shuttering of key oil fields, the appearance that recent moves by Iran to remove nuclear monitoring equipment of the IEA has set back negotiations for a new nuclear agreement, as well as ideas that OPEC excess capacity remains limited.
Once again, the DOE report on Wednesday should provide some guidance on the adequacy of inventories. Current forecasts indicate commercial crude stocks will fall by 1.2 mb, as the SPR is tapped. Gasoline is expected to be up .8 but distillates are estimated as unchanged, while refinery utilization looks to have increased by .5 to 94.7 percent.
Although upside potential for crude still exists, uncertainty presented by the Chinese lockdowns along with Fed policy might provide a less enthusiastic view of the market in the near term, which could provide the basis for range bound trade in the 116.00 to 123.00 area basis July.
Natural Gas
Prices struggled to find support as the July contract slipped 24 cents to end the day at 8.609. Uncertainty over the length of the shutdown at Freeport LNG lead to further selling as the likelihood of a 3-week window as initially estimated came into question. The 40-45 bcf of additional supply in that scenario could be offset by the current regime of extreme heat across much of the US, but an extension into a 1-to-2-month timeframe could have a more substantial effect on domestic storage, which could ease upward price pressure if more comfortable EOS levels become possible. Spillover was seen from a sharp selloff in equities as they near bear market territory, which lead to across-the-board weakness in commodity markets. Unimpressive production levels near 95 bcf/d along with the unseasonably warm temperatures kept the market from building too much downside momentum. The 9-dollar level likely remains solid resistance until the Freeport situation becomes clearer, while any talk of an increased duration of the shutdown could lead to a quick retest of 8 dollars.
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