Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex traded on both sides of unchanged to close moderately higher, with the back months outperforming the nearby in crude. Selling interest was tied to economic concerns while the weakness attracted buying on prevailing tightness in supplies and inventories. The reported underproduction by OPEC+ remains a key consideration along with the push for stricter sanctions against Russian energy exports, particularly for oil. The selling interest was surprising given today’s DOE report showing a larger than expected decline in US inventories, and might have been influenced by a further downside retracement in natural gas. Concern over demand destruction was tied to IMF economic forecasts that showed a 1 percent downward revision in the global growth forecast yesterday, along with the higher prices and tightening availability discouraging demand.
For now we are unconvinced that lower valuations are justified. The prospects for demand are uncertain and for now not enough to limit inventory declines. Instead, the rising under compliance of OPEC+ which produced as much as 1.45 mb/d below its target in March and ongoing blockades against major oil fields and pipelines in Libya where as much as 550 tb/d of oil has been shut in will likely remain as background sources of concern over supply availability. Only a dramatic shift in OPEC policy to higher output from the Saudis and UAE might upset the bullish sentiment.
The DOE report showed a decline in commercial crude oil inventories of 8 mb despite a draw in the SPR of 4.7. Some hope continues to be apparent given the increase in US crude production to 11.9 mb/d, the highest since May of 2020. Crude export levels surged to 4.3 mb, the highest since March of 2020 as exports to Europe continue to rise. Refinery utilization rose by 1 percent to 91. Inventories fell by .8 mb in gasoline and 2.7 mb in distillate. Total disappearance for all product supplied continues to be challenged with the four-week average falling to 19.4 mb, the lowest since June of 2021. It was noteworthy that ULSD traded higher despite the declines in gasoline and crude as the June 2-oil crack continues to surge, trading as high as $51.80 per barrel on rising demand for jet kero, limited availability of heavier Ural crude from Russia, limited refinery capacity, and the higher prices for natural gas.
Natural Gas
The pullback finally arrived, with the May contract having a high to low move of 1.27 over the last three sessions. Monday’s gap was easily filled yesterday, with followthrough today nearing a 38 percent retracement of the rally since mid-March. With no major changes to the fundamental picture, the retrenchment appeared to be technical in nature with a large portion of the upside over-extension reclaimed on profit taking. Expectations for output to increase by .7 bcf next month from the EIA’s Drilling Productivity Report on Monday started to uncover selling interest, with private estimates of a jump to well over 100 bcf/d this summer adding downside momentum. Pressure from overseas has also seen a temporary reprieve as weather has moderated and flows from Russia have been maintained, allowing storage levels to slowly improve. LNG flows continue to lag due to seasonal maintenance, but the outlook still points to maxed out exports due to the war in Ukraine and the need to refill European storage tanks. Coupled with US production continuing to underperform, the 6.71 level looks like solid near term support to any further selling pressure, and beyond that at 6.29. With the upside cleared out, substantial resistance likely doesn’t surface until the 7.50 area.
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