Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Prices traded on the defensive with WTI settling 1.27 lower at 74.15. Chinese economic data was mixed, with GDP rising 6.3 percent year over year compared to expectations for an increase of 7.3 percent. GDP grew .8 percent, higher than expectations for a .5 percent increase. Industrial output grew last month to register a gain of 4.4 percent in June compared to the prior month at 3.5 percent. Additional pressure was derived from the resumption of output at two of the three Libyan fields that had been shut last week by protests against the abduction of a former finance minister who has reportedly been released.
The revision downward in global demand, comfortable inventory levels as suggested by the IEA last week, and the struggling recovery in the Chinese economy continue to weigh on bullish sentiment. Better availability has been reflected by the weakness to the crude spread backwardation despite reports of Russian export levels falling at Western ports.
As we move toward the end of the month, additional voluntary cuts by the Saudi’s and Russia will be a point of discussion. With values advancing as much as 6 dollars since their initial actions, uncertainty over additional 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 feel do not reflect 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 crude and possibly 71.00-72.00 where support is likely to reemerge.
The DOE report is expected to show crude stocks lower by 2.3 mb, distillate down .1 and gasoline off 2.1. Refinery utilization is expected at 94.0 percent.
Natural Gas
The market tone remained negative to start the week, as the August natural gas lost 2.7 cents to settle at 2.512. Trade remains subdued as demand created by extreme heat across a large portion of the US has had little sway on valuations as we grind through the heart of summer. The ample storage situation, with total stocks currently 14.2 percent above the 5-year average, has been the key limiting factor, aided by strong renewable generation at the most opportune time to ease the call on natural gas. Prices dipped below 2.50 again this morning before recovering into the close, with another test of that area in the coming days likely leading to a breakdown that could test the lows near 2.25. Forecast revisions over the weekend lowered demand expectations slightly, but temperatures are still expected to be above normal every day throught he end of the month. There is still hope for a recovery in values, but it may now require the assistance of LNG demand and slowing production. The 9-day moving average currently at 2.61 remains a key level, with a move above there needed to stir up additional buying interest.
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