Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Prices settled sharply lower, with the August contract off 1.47 at 75.42 following an early move that tested yesterday’s high at 77.33. Prices failed to follow through on the early strength that was linked to supply disruptions in Nigeria and Libya. Instead profit taking ahead of the weekend along with key economic reports for China on Monday injected caution into trade.
The IEA report yesterday also tempered bullish expectations. The report revised downward global oil demand to 102.1 mb/d, an increase of 2.2 mb/d for 2023. Persistent economic headwinds, apparent in a deepening manufacturing slump, prompted the revision downward for the first time this year of 220 tb/d. World oil supply is expected to reach 101.5, an increase of 1.6 mb/d as non-OPEC expands by 1.9 with a further expansion expected in 2024 of 1.2 mb/d. Inventory levels experienced a sharp build in non-OECD countries in May of 44.2 mb led by a surge in China with global inventories rising 19.4 mb. In the OECD, stocks fell by 23 mb. Overall global observed inventories look comfortable having recovered to their highest level since September of 2021.
The revision downward in global demand, comfortable inventory levels as suggested by the IEA, and this week’s DOE report might provide the basis for a retracement in values until a more accurate reading of third quarter demand develops. The Chinese economic reports on GDP and industrial production should shed light on the outlook and how strong the headwinds might be. Current forecasts for Chinese GDP suggest it grew .5 percent from the prior quarter while industrial production is expected to have grown by 2.7 percent over last year. In addition, with values advancing as much as 6 dollars since the Saudi and Russian production cuts, uncertainty over further voluntary moves past August might begin to evolve. Questions have recently arisen as to whether the production cuts are merely a means to support prices in what some members have cited as not reflecting fundamental influences, or whether demand is weaker than currently forecast given the slower than expected Chinese recovery.
We see stocks declining in the second half of the year, but due to consumption issues in China and continued good availability from Russia and Iran, the decline might not be as dramatic as currently envisioned. Near term look for a retracement toward the 73.00 area basis prompt WTI crude and possibly 71.00-72.00 where support is likely to reemerge.
Natural Gas
The second half of the week saw continued weakness as the August contract tested the 2.50 support area before ending marginally lower at 2.539, marking the lowest settlement price since mid-June. Multiple factors have contributed to the weakness. LNG flows have trended downward recently to under 12 bcf/d while production, although easing recently, has regained the 101 bcf level at a time when a pullback had been expected. Weather remains hot, but yesterday’s 49 bcf injection, although below estimates, was unable to stir up any buying interest due to reclassifications from the prior week that raised overall storage by 4 bcf. Even record demand currently being experienced in the South Central region has been met with above average renewable gereration which has eased the burden on gas. The 2.50 level remains key support on a settlement basis, without much below there until the contract lows near 2.25. With record heat still expected into the second half of July, look for that support to hold as demand escalates. The 9-day moving average near 2.63 is the first resistance that must be violated to signal a return of upside momentum.
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