Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex traded on the defensive, falling back toward the 110-area basis July for a decline of over 6.5 percent. Fear that a recession would impede global oil demand encouraged the strong selling interest. The demand concerns helped detract from bullishness emanating from the ongoing supply disruptions in Russia, Libya, Iran and Venezuela along with the underproduction by OPEC relative to targets. In addition, some anticipation was noted ahead of Biden’s meetings next month in the Middle East and the possibility that Saudi Arabia and the UAE might increase output to help offset lower Russian availability and to improve relations with the West.
The sharp reversal in crude below the 116-area basis July suggests that sentiment might be changing. Whether the downside impetus can be maintained will be contingent on a steady deterioration in both the US and Chinese economy and how far the Federal Reserve is willing to go with respect to raising interest rates that have already begun to impact the housing industry.
Crack margins have been mixed, suggesting the jury is out on the course of the economy and the petroleum complex. Strains are still apparent for ULSD, where demand for freight and aviation fuel has kept margins near record highs. Gasoline margins have been weaker suggesting the retrenchment in demand, but to what extent remains to be seen.
Natural Gas
Prices have settled in a comparatively tight range since Tuesday’s announcement from Freeport LNG that their shutdown would last for 90 days, while full operations likely won’t resume until late in the year. The market had pushed back to the 8 dollar level yesterday prior to the weekly storage report as extreme heat across large portions of the US pushed demand expectations steadily higher. The release marked the market turn, as the 92 bcf build and revisions to the prior two weeks resulted in an additional 4 bcf in storage and brought out selling interest. Downside momentum built as the weeky rig count showed an increase of 7, and weakness in the petroleum complex spilled over to the natural gas. By the end of the day the 7 dollar level had been breached as the July settled 52 cents lower at 6.944. The break has left the next area of support down at the 100 day moving average near 6.40. Resistance now arises in the 7.50 area while 8.00 rmains a key level that likely holds up unless temperatures maintain current extreme levels or some good news emerges from Freeport.
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