Written Commentary
Price Overview
The petroleum complex was on the defensive as the spread of the Delta variant heightened concerns regarding further restrictions of travel, especially in Asia. The recent spike in cases has led to a more cautious view of demand expectations.
Doubts are beginning to emerge on the durability of demand, particularly in Asia, which is leading to an evaluation of upside potential that had been seen at 80.00 and above for Brent to near 70.00 now. Talk that the recent effort by Saudi Arabia to raise its prices to Asia is meeting resistance as Chinese demand continues to falter and competition from US and Russian sources is beginning to grow. The concerns have been exacerbated by the resurgence of Covid in China just as production increases under the OPEC+ agreement. The growing concerns over demand were highlighted by the failure to respond to the tension in the Middle East and ideas that there will not be a quick lifting of sanctions against Iran. Disappointment was also apparent after strong US job gains in July on ideas that the improvement will retrench over ensuing months if the Delta variant continues to spread in the US and globally. China remains the focus as slowing import levels for crude and expanding lockdowns raise speculation that the vaccines manufactured and utilized there might not be as effective as other options.
Given the importance of China as a consumer and importer of crude, the uncertainty over the Delta variant and its impact on demand will be watched closely as it will be a key variable effecting how quickly inventories are drawn down into the end of the year. The breakdown below the 70.00 level is negative and any rallies will require improvements in the Covid situation along with continued growth in the global economy.
Natural Gas
The market continues to be well supported as the September matched its contract high yesterday before seeing some profit taking, then followed up today with two-sided trade to settle at unchanged levels. The weekly storage report was supportive as it showed a 13 bcf build verses expectations at 28. A fire at a Russian gas plant that supplies Germany through the Nord Stream 1 pipeline pushed up European gas prices as they continue to compete with Asia for US cargos. Although the overall effect of the outage is uncertain, it increased concern in Europe as their storage levels remain well below normal with summer dwindling away. Weather reports were mixed today with the two-week expectations still firmly above normal. With the incentive to export remaining strong due to record high global prices and demand supported by warm forecasts, tightness is likely to continue which could extend the rally to test the 4.40 level into the second half of the month. Initial support to any retrenchment likely surfaces in the 4.05 area.
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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