Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex traded sharply lower in reaction to weaker than expected factory activity in China and Japan, along with a recovery in Libyan production. The appearance that the Senate Democrats $430 billion spending bill would effectively guarantee continued drilling rights on federal lands and waters also helped dispel bullish sentiment seen last week. The weakness carried values back through support near 94.00 basis September crude while gasoline and diesel values both fell by over 10 cents.
We look for support to emerge ahead of the OPEC+ meeting that begins on Wednesday as supply concerns move back into focus. Reports that they will consider keeping oil output targets unchanged should regenerate buying interest. The meeting begins on August 3rd and the question remains if Saudi Arabia is willing to raise production in response to pleas by the Biden Administration. The need for the largest producers to boost output has been apparent given low commercial inventories in the OECD along with the inability of many OPEC producers to reach targets due to the lack of investment and difficulty getting key materials due to supply chain disruptions. In addition, fears over Russian availability due to sanctions remain in the background, particularly in Europe. The supply concerns have begun to manifest in the strong demand for US exports of crude and products, while demand concerns linked to recessionary fears due to higher interest rates and slower growth in China remain in the background, a reduction in gas flows to one quarter their normal level in Europe should continue to attract substitution of petroleum derivatives, keeping demand for US product exports strong despite higher prices.
We still see the potential for the crude to move higher, albeit in a choppy fashion, as the market quickly absorbs additional supplies from Libya. We continue to see the potential for crude to test the 109-110 level basis September in the intermediate term into the hurricane season. A break of the 91.00 level would foreshadow additional declines toward the 88.00 area.
Natural Gas
The market gapped lower overnight as strong weekend production numbers created good follow through of the weakness seen during the second half of last week. Output exceeded 98 bcf Friday through Sunday, the highest this year, and pressed prices to an intraday low at 7.753 before late buying interest reversed the move as the September contract settled at 8.283 for a gain of 5.4 cents on the day. Weather was also initially a negative influence as weekend revisions decreased CDD expectations in the 15-day forecasts. Underlying support emanated from the fact that demand expectations remain well above normal despite the forecast revisions. A Reuters story this afternoon indicating that Freeport was still expecting to restart operations in October reignited buying interest as it appeared that trade may have been assuming a later date. Today’s early weakness reached a 38 percent retracement of the July rally, with the strong close resetting the 8-dollar level as key support on a settlement basis. Initial resistance arises near 8.39.
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