Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex traded on the defensive, initially falling to a low of 101.53 in the August contract, a decline of almost 8 dollars and the lowest price levels since May 11th, before recovering to show a loss of 3.30 on the day. The product markets also weakened but more modestly as concerns over refinery capacity constraints remained in the background.
The weakness in crude can be traced to demand concerns amid a slowing in the world economy due to tighter monetary policies and dollar strength. In addition, high prices are discouraging demand as well. Whether this will be enough to lead to a rebuilding of global inventories remains to be seen and doubts over this scenario were evident as the market recovered from the sharp early losses.
A US recession could have a pronounced effect on oil demand, but the jury is out on whether it will occur. The Federal Reserve Chairman continues to suggest that he will respond to inflationary forces and reiterated that Fed policy would be linked to the economic outlook.
Demand considerations appear to be priced in with today’s move toward the 100.00 area, as focus might once again shift to the supply side and concerns linked to the ongoing disruptions in Russia, Libya, Iran and Venezuela along with underproduction from OPEC. Offsetting these concerns might be some hope that President Biden’s trip to the Middle East next month will be successful in securing additional supply from Saudi Arabia and the UAE to help offset lower Russian availability and improve their relations with the West. Once again, the 115-116 area might be an important equilibrium point contingent on the state of the global economy along with how far the Federal Reserve is willing to raise interest rates.
The delayed DOE report for release at 10:30 CST tomorrow is expected to show crude inventories down .6 mb with distillate up .3 and gasoline lower by .5. Refinery runs are expected to improve .5 to 94.2 percent.
Natural Gas
The market has continued to struggle to find footing after last weeks explosion at Freeport LNG. Yesterday’s weather revisions decreased CDD expectations and pressed prices down to an intraday low at 6.531 basis August before support emerged today, with prices gaining back 8.9 cents to settle at 6.872. The recovery was technical in nature as the market had become oversold and support in the 6.50 area remains formidable. Lackluster production near 95 bcf/d added underlying support. Tomorrow’s storage report is estimated to show a 65 bcf injection compared to the 5 year average of 82 as warm temperatures increased power burn. The 7 dollar level should offer resistance as the market awaits a clearer idea of whether the June heat is going to carry over into July. A bounce higher in CDD expectations could see prices test up to the 7.50 area.
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