Energy Brief for July 10.23
by market analysts Stephen Platt and Mike McElroy
Uncertainty over the strength of the Chinese economy posed resistance above 74.00 and led to a weak close, with crude finishing lower by 87 cents while gasoline and ULSD settled off 1.99 and .59 respectively. Concerns were amplified following news that China’s producer prices fell at their fastest pace in over seven years in June. The appearance that the momentum of their post-pandemic recovery has slowed from the brisk pick-up evident in the first quarter helped undercut buying interest. Questions arose over how quickly and aggressively the Chinese central bank will lower interest rates in an effort to spur a pickup in real estate, construction and industrial production. Additional fiscal stimulus will also need to be pursued given the high unemployment among youth and weak balance sheets. Offsetting these concerns were the OPEC+ production cuts for August and the likelihood that they will be renewed until prices reach an acceptable level, which is likely above 76.00 basis WTI.
Although concerns persist over economic growth in China, the US and Europe, signs that the main OPEC+ producers will do whatever it takes to prop up prices should provide a supportive tone on setbacks. We continue to look for values to advance to the 75-76 level basis prompt crude, with support at 71.00 basis August. Production cuts by Saudi Arabia and Russia will exacerbate the deficit expected in the second half of 2023 despite the economic challenges apparent in China and the US. Of interest will be the release on Wednesday of June CPI and its impact on interest rates, Fed policy and the dollar.
The DOE report will be watched closely for further declines in inventory levels. Current forecasts point to a build in crude stocks of .2 mb, with gasoline expected off 1.3 mb and distillate lower by .4. Refinery utilization is expected to have increased .5 to 91.6 percent.
The market found good support to start the week, gaining 8.7 cents to settle at 2.669. Weather was the underlying driver as forecasts warmed into the second half of July. The strength came on somewhat light volume as prices retraced through the top end of Friday’s range. Heading into peak summer demand, the market is trying to balance the expected heat in the US and Europe against the ample storage situation, with US reserves currently 14.6 percent above the 5-year average. Despite the strength today, the settlement remained below the 9-day moving avearage which is currently at 2.686. A settlement above there in the coming days could lead to a test of the 100-day moving average near 2.73. A turn back lower will find initial support near 2.6, and failing there the psychological 2.50 level should slow any downside momentum.
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