Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex traded higher but within yesterday’s trading range, settling up 63 cents at 77.59 basis September. Support was apparent near the 77.00 area as the market attracted buying in response to the DOE figures which showed a draw down in both crude and product stocks along with good disappearance rates for gasoline. The market remained cautious on the upside as Chinese demand concerns raised the specter of stock increases later this year. Production by OPEC+ above established quotas remained in the background despite promises to compensate for excesses. These concerns were broached following reports Russia exceeded its oil export quotas in June. Until more evidence of compliance surfaces, Saudi Arabia, who has shouldered the lion share of voluntary output cuts, could look to raise production in order to take market share back and address their widening budget deficit.
The DOE report overshadowed the above concerns as both crude and product inventories fell more than expected. Commercial rude stocks declined by 3.7 mb while gasoline and distillate fell 5.6 and 2.6, respectively. Cushing crude inventories fell 1.7 to stand at 31.0 mb. Total stocks of crude and products fell 4.6 mb. The sharp decline in crude inventories was surprising given the decline in refinery utilization rates to 91.6 percent compared to 93.7 last week on margin weakness. Total disappearance of products at 21.0 mb/d was up over 1.6 from the prior week and compares to 20.7 last year. Gasoline disappearance reached 9.5 mb compared to 8.8 last week. Distillate disappearance reached 3.9 mb/d compared to 3.7 last year, while net exports were 1.8 mb/d against 2.4 last year.
The crude market attracted support near the 77.00 level basis September. The tighter inventory situation and wildfires in Canada should limit declines in the near term as the market assesses longer term macro variables. The Chinese economy remains a key component of the outlook. The political situation in the US will become a consideration due to how it might impact the dollar, capital investment and environmental policies and regulations. Resistance near the 81.00 level basis September should be formidable, particularly if margins remain weak as new refining capacity comes on stream from the Middle East and on the potential for inventory rebuilding later this year.
Natural Gas
The rally ran out of steam after failing to make a new high yesterday, ending with a loss of 6.2 cents followed by an additional 6.6 cent drop today as the active September settled at 2.158. A jump in production to 103 bcf yesterday combined with guidance from EQT, the largest US producer, indicating that they would maintain output at current levels into the 4th quarter pressured values. Current weather patterns are generating below normal demand as well, but the back half of the 15-day forecasts have maintained expectations for temperatures that would be the hottest of the summer. With Freeport nearing full capacity, LNG flows reached 12.6 bcf today and look poised for further near term gains, which could help stabilize prices and possibly kick-start a rally if temperatures rise into early August. There is minor support near 2.13 without much below there until the contract lows at 2.055 basis September. A move higher will first have to surpass resistance at the 9-day moving average near 2.20 to build up momentum for a run at the 2.473 level, which marks a 38 percent retracement of the June-July break. Tomorrow’s weekly storage report is expected to show a build in the 16 bcf area compared to the 5-year average increase of 31.
**The Energy Brief will be discontinued on July 26th.**
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