Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil prices rallied following yesterday’s weakness which was traced to demand concerns in China. A slower than expected stimulus response by Chinese monetary authorities following poor growth in the retail and factory sectors along with strong demand for electric vehicles appeared to shade downward prospects for oil demand. Support developed today reflecting delays to reopening flows from Kurdistan along with optimism that US economic prospects remain strong despite the probability of further interest rate hikes by the Fed.
Although Chinese refinery throughput has been strong on a recovery in margins, they appear to have topped on Friday at over 32 in the August ULSD crack and near 37 in the gasoline crack, presenting uncertainty with respect to demand. This will put the DOE report, which will be released tomorrow due to the holiday, into focus. Expectations are for a draw in crude of .4 mb, distillate to be up by .8 mb and gasoline down .2 mb. Refinery utilization is expected to be up .2 percent at 93.9.
A stable outlook from 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 also remain a focus given reports of good availability and the possible reopening of discussions between the US and Iran aimed at limiting their nuclear program. Saudi efforts to support values with additional production cuts could also 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 emerge on setbacks toward the 68.00 area. An accommodative monetary policy in China and strength to India’s economy will help tighten inventory levels and underpin valuations later this summer with potential to push values toward the 75-76 level basis prompt crude.
Natural Gas
Last week’s rally was able to follow-through early in the session yesterday as the active August contract posted a high at 2.783 before pulling back to end the day with a 15-cent loss. The selling was driven by profit taking and minor downward revisions in CDD expectations. Action today was two-sided early on until prices began to work higher mid-session to end with a gain of 10.7 cents at 2.677. Buying interest was supported by intense heat in Texas that is expected to spread to a wider swath of the US early next week. Rumors that the planned maintenance at Sabine Pass that has taken approximately 2 bcf/d from LNG exports will be coming to an end soon added to the upside bounce. The South-Central heat wave is also affecting Northern Mexico, as export demand has increased well above normal for this time of year and added background support. Tomorrow’s storage estimates point to a 91 bcf build, which compares to the 5-year average of 86. An increase on the high side could take some of the sheen of the recent rally and remind trade of the ample storage overhang. The strong close hints at further upside, with another test of the 100-day moving average near 2.78 the next target with resistance beyond there at the May high of 2.885. With the middle portion of today’s range traversed multiple times over the last few sessions, decent support does not emerge until the 2.50 level basis August.
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