Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex traded mixed with crude under pressure, losing $1.61 on the day, but products and the cracks firm on low stocks. The weakness in crude continues to be traced to a deteriorating economic outlook in China following smaller than expected growth in industrial production of 3.7 percent compared to expectations at 4.4, and retail sales rising 2.5 percent compared to estimates for a 4.5 percent increase. Somewhat troubling was the lack of reporting on youth unemployment which reached 21 percent in June. The data is forcing adjustments in Chinese GNP to a 4.5 percent growth rate compared to 5 percent estimated previously. Although they cut key rates in response to the weak economic data, many analysts are beginning to feel it might not be enough to resuscitate the economy and more aggressive steps might be necessary.
Offsetting some of this weakness was the DOE report which showed crude inventories falling by 6.0 mb to 439.7 mb. Gasoline stocks fell .3 while distillate stocks built by .3. Total stocks of crude and products fell 7.4 mb. Refinery utilization rose to 94.7 percent from 93.6 percent in the prior week. Crude stocks at Cushing fell to 33.8 mb. Disappearance for all products was buoyant, reaching 21.7 mb compared to 20.7 last week and 20.9 last year, while export levels for crude and products remained lackluster at 1.8 mb/d compared to 1.5 last week and 2.7 last year.
The uncertain outlook for China’s economy, ideas Saudi Arabia might pare back or eliminate the voluntary production cut after September due to budgetary considerations, and dollar strength are curtailing buying interest. Eliminating or reducing subsidies in some countries that are fiscally challenged could slow the growth in demand early next year, particularly on the back of weaker than expected growth in China. The uncertain demand environment and questions over the extension of Saudi voluntary cuts might provide the basis for a further setback in values toward the 100-day average near the 76 area basis September crude.
Natural Gas
Prices have weakened considerably since the beginning of the week, with yesterday’s 13.6 cent loss followed by an additional 6.7 cent drop today. Moderating forecasts have been the driver of the weakness, with CDD’s decreasing steadily since Monday. The recent trend of heat predicted in the back end of the outlooks not materializing as it moves forward has deterred any significant buying interest. The risk of LNG worker strikes in Australia have remained in the background since roiling markets last week, but remain a potential catalyst as final decisions have not been reached by unions as negotiations continue. Today’s settlement at 2.592 was just below the 100-day moving average, which signals further weakness near term initially targeting the mid-July and early August lows near 2.46. A settlement below there could lead to a test of the summer lows at 2.249. Any recovery in values will encounter minor resistance near 2.68 and then in the 2.73-2.76 range.
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