Written Commentary
Price Overview
Prices traded sharply lower as concern increased over economic prospects in Asia and to a lesser extent the US. The weaker signs supported forecasts for slower oil demand growth as we move toward the fourth quarter and encouraged the early selling interest. Some recovery was noted following a report that OPEC+ had indicated there was no need to add supplies to the market despite US pressure.
The weaker sentiment was bolstered by reports that China’s factory output and retail sales growth had slowed sharply in July as new COVID-19 outbreaks and floods disrupted business operations. Industrial production increased 6.4 percent year on year in July compared to a rise of 8.3 in June and expectations for an increase of 7.8. Retail sales increased by 8.5 percent from a year ago, far below forecasts at 11.5 percent and the 12.1 percent increase seen in June. The weak economic news followed reports that daily crude throughput in July fell to the lowest level since May 2020 as independent refiners known as teapots scaled back processing in response to tightening import quotas and weak margins. In addition to China, reports late last week that US consumer sentiment had fallen to its lowest level in over a decade and that India’s fuel demand fell in early August also impacted the outlook for demand.
The indication that no change in OPEC policy is currently being contemplated leaves open the potential for adjustment in the future. The uncertainty over their ability to revise supply plans if lower demand forecasts prove correct is likely to provide support toward the 65.00 area basis October crude.
The DOE report Wednesday is currently expected to show crude inventories off by 1.3 mb, distillate down .2 and gasoline lower by 1.8. Refinery utilization is expected to increase by .2 percent.
Natural Gas
After making new lows overnight the market posted solid gains to end the day 8 1/2 cents higher at 3.96 basis October. The early weakness likely stemmed from follow-through selling in the wake of last week’s storage report and a cooling trend in the back half of the 15-day weather forecasts. Prices began to recover early in the day session as European LNG prices jumped to new highs on concerns surrounding Russian supply issues. LNG flows continue to impress due to these large overseas premiums as total flows have exceeded 11 bcf/d twice in the last week. The 3.83 area was tested today and with the strong rejection of that level it now stands as key support. With warming expected to increase demand in the coming week prices look poised to test the 4.05 level near term. Early indications for this week’s storage report are pointing to a build in the area of 31 bcf compared to the five year average of 42.
Charts Courtesy of DTN Prophet X, EIA, Reuters
The authors of this piece do currently maintain positions in the commodities mentioned within this report.
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