Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The market traded mixed with October crude finishing 27 cents higher at 80.10 while the products finished sharply lower as ULSD lost 9.62 cents to 3.1711 and RBOB was lower by 7.81 cents at 2.5669. The October RBOB crack subsequently finished lower by 3.60 at 27.66 and the 2-oil crack lost 4.11 to end at 53.29, taking back a substantial portion of the gains seen last week. The weakness to products was in response to lackluster economic activity in Europe and Asia and uncertainty over future Fed policy. Reports that the US is also drafting a proposal that would ease sanctions on Venezuelan petroleum exports injected caution into trade along with the seasonal decline in gasoline usage following Labor Day. Increasing production from Iran remains in the background with reports of more oil moving to China and competing with Russian crude due to its favorable discounts.
In the background remains the likelihood of an announcement in the next week by Saudi Arabia regarding an additional voluntary output cut. Most analysts expect current cuts will be carried over into October given the uncertain economic outlook in China. Recent stimulus measures are seen as too little to significantly influence current trends in investment and retail consumption. The Chinese housing market and construction activity have been weak along with youth employment levels. The Chinese PMI is scheduled for release late Wednesday evening. Hurricane Idalia does not currently appear to be a threat to Gulf Coast oil production or processing.
The petroleum complex might mark time awaiting additional input on global stocks and the course of Saudi policy. A further cut will help absorb additional supplies from Iran and possibly Iraq, where talks with Turkey on shipping oil from the Kurdistan region are progressing and could allowing for the export of an additional 450 tb/d.
The double bottom from Wednesday and Thursday near 77.60 marks initial support, with a move below that level targeting 76.00.
The DOE report on Wednesday is expected to show crude stocks declining by 2.9 mb, gasoline lower 1.4 and distillate up .1 mb. Refinery runs are expected at 94.6 percent against 94.5 last week.
Natural Gas
Prices gapped higher overnight with the October contract gaining nearly 9 cents on the reopen. The strength was initiated by weekend forecast revisions that increased warming in the middle of the 15-day outlooks, but not enough to justify the severity of the jump. Stop orders above the 100-day moving average near 2.70 amplified the opening spike, with concerns over the direction of Tropical Storm Idalia adding to panicky trade. Strength continued into the morning but began to reverse course by mid-session as the overnight gap was filled and prices ended near unchanged levels at 2.665 basis October. The reversal gained steam as trade assessed the current path of Idalia, which is expected to skirt the Eastern edge of Gulf production areas, potentially slowing LNG tankers briefly, while its most likely outcome will be demand destruction as it becomes a hurricane and wreaks havoc on its path inland. The failed rally attempt put the market right back where it ended last week, with initial support near 2.57 and below there at the June lows of 2.377. With resistance cleared out on today’s spike, a settlement above the convergence of the 9 and 100-day moving average in the 2.68-2.69 range would not find much additional resistance until the 2.80 area.
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