Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Prices traded on the defensive early in the session, with the June crude reaching a low of 80.70 as relative calm in the Middle East over the weekend led to additional liquidation. Follow through on the downside was lacking, with values settling at 81.90 for a loss of 22 cents as drone attacks on Russian oil storage facilities by Ukraine supported values. The cautious tone reflected a variety of counterbalancing influences. On the bullish side was Israel’s hawkish stance and likelihood for an attack on Rafah, which could lead to a wider conflict that could disrupt shipments through the Straits of Hormuz, where close to 20 percent of the world’s crude oil transits. Offsetting these concerns was good availability of crude afloat which has tended to weaken nearby differentials, along with Israel’s measured response to Iran’s retaliation last week, which suggested a hardening of the coalition that thwarted their attack. The group, which included the US, UK, UAE, Saudi Arabia, and Jordan proved effective at dissuading Israel from a more widespread response.
The question now is whether the response will lead to a de-escalation of the conflict. A key measure will be whether there are increased attacks by Hezbollah in Lebanon or the Houthis in the Red Sea. Changes in foreign policy by Iran might also be afoot. Whether this leads to a broader effort at compromise among the combatants needs to be monitored, particularly as it applies to Russia’s alliance with Iran. In addition, other factors are at work. These include a recovery in Libyan output from outages earlier this year along with an increase in US exports of light crude to Europe which have helped weaken crude differentials for light oil. In addition, the strength to the dollar has potential to weaken demand growth overseas.
The potential for further long liquidation could carry values down toward the 80.00 area and failing there toward the 100-day moving average at 76.84 basis June crude. Lower prices may provide a basis for demand recovery. How OPEC+ manages these challenges should provide a source of support given their commitment to stabilizing prices.
The DOE report is expected to show crude inventories rising 1.8 mb, distillate dropping 1.8 and gasoline lower by 1.4 mb. Refinery utilization is expected to gain .5 to 88.6 percent.
Natural Gas
Signs that Freeport may be ramping up activity brought out buying interest as the May gained 3.9 cents on the day while the June added 7.7 to settle at 1.791 and 2.065 respectively. Flows near .5 bcf yesterday and today following weeks of negligible activity raised speculation that train 3 was coming back online. An improvement in overall flows of nearly 2 bcf since late last week added to the positive bias. The market is also being underpinned by steady decreases in production, with today marking the seventh straight session of sub-97 bcf output if early nominations hold up. Today’s settlement moved convincingly through the 9 and 20-day moving averages and also marked the highest settlement this month. The next upside target for the June contract is near 2.10 and then the high of our recent range near 2.15. Support moves up to the 2 dollar area where the 9-day currently rests, and below there near 1.95.
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