Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil prices traded higher to settle at 71.78 basis July for a gain of $1.16. Uncertainty regarding the US and Chinese economies continued to be a key consideration. The market built on news yesterday of a strong recovery in Chinese refinery throughput of 15.4 percent, along with additional stimulus from China’s central bank to counter slowing growth in industrial output and retail sales. The news, along with the recent strength in equity markets, helped counter weakness Wednesday on the appearance the US Federal Reserve will maintain higher rates longer than had been expected.
A stable outlook by OPEC, an expansion in oil demand, and marginal increases in supply for the remainder of the year should provide support to values. Steady growth in demand from key non-OECD consumers such as India and China should offset the lackluster demand in OECD countries. Supplies from Russia and Iran will remain a focus given reports that the US is holding discussions with Iran aimed at limiting their nuclear program. Saudi efforts to support values with additional production cuts will also be monitored and could help limit downside pressures. In the background will be the cessation of SPR sales by the US and moves to begin rebuilding reserves if values move into the desired zone below 70 dollars. Near term, the potential for further rate hikes in the US and Europe might lead to price pressures but look for support to develop on setbacks toward the 68.00 area as an accommodative monetary policy in China and strength to India’s economy help tighten inventory levels and underpin valuations later this summer. Overhead resistance between 75-76 basis July is likely.
Natural Gas
Prices managed an upside breakout yesterday, as the mid-week drop in production coupled with the maintainence of expected warming in the forecasts had the market trading considerably higher prior to the storage report. The surprisingly low 84 bcf build added fuel to the rally and pushed prices to 19 cent gains on the day. Good follow-through was seen today as the July added another 10 cents to end the week at 2.632. After months of weak trade it is not surprising to see the market react in a knee jerk fashion to positive news despite the overall negative storage situation. Extreme heat in Texas and surrounding areas that looks likely to continue into next week has awoken trade to the potential for increasing summer heat, which is coinciding with decreased production, lower Canadian imports and good demand from Mexico to alter the potential supply/demand balance.Today’s high at 2.653 marked a 38 percent retracement of the break since early March, with the next resistance level comes in at 2.816 which marks the highs from mid-May as well a 50 percent retracement of the break. Trendline resistance near 2.56 now becomes initial support, and below there at the psychological 2.50 level.
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