Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex surged to the upside, settling 1.73 higher at 81.44 basis September crude. The inventory decline reported by the DOE today, expectations for additional stimulus to reinvigorate the Chinese economy following the Third Plenum that ends Thursday, and an attack on a tanker by Houthi rebels in the Red Sea touched off the strong buying interest. Product markets trailed the crude as large stock builds discouraged interest and led to pressure on the cracks.
The DOE report showed commercial crude inventory levels falling 4.9 mb. Conversely, gasoline and distillate stocks rose 3.3 and 3.5 mb respectively. Total stocks of crude and products were higher by 10.4 mb as propane and jet kero stocks also rose sharply. Refinery utilization rates fell 1.7 to 93.7 percent. Domestic production was steady at 13.3 mb/d. Disappearance levels for crude and products was reported at 19.4 mb/d, a decline of 1.3, reflecting disruptions from Hurricane Beryl. Gasoline disappearance was 8.8 mb against 9.4 last week, and distillate reached 3.7 mb compared to 3.6. Net export levels fell to 1.3 mb from 1.9 last week.
The extent of the rally was surprising, as the 85.00 level basis August remains solid resistance. We are doubtful that the Chinese economy will recover sharply from the sluggish levels reflected in the GDP report released earlier this week. In addition, the weakness to margins seen today will undermine Asian pricing, limiting inputs to refineries in China and keeping crude import needs restrained. Apprehension over OPEC production levels will persist, limiting the effectiveness of the current agreement. Signs the US economy is slowing along with concerns over the pace of growth in China and Europe will offer overhead resistance on ideas that inventory levels might not fall as much as expected in the third quarter, and on the potential for a stock build in 2025 as OPEC unwinds its production cuts potentially late this year. In addition, rising imports of crude oil from Canada following the TMX pipeline startup will offer better supply availability.
Natural Gas
After a brief respite yesterday, the market continued its downward push as the August contract lost 15.3 cents to settle at 2.035 today. Current normalized weather has removed underlying support, but fundamental news flow was not exclusively bearish as the weakness signaled a throwing-in of the towel by fund longs. Production saw a significant drop to under 100 bcf after peaking near 103 over the weekend, but that likely gets revised higher in the late cycle nominations. Freeport has initiated its restart, with .45 bcf being pulled into the facility today, which should rustle up support unless the pace of recovery is drawn out. The weakness pushed prices near support at the psychological 2 dollar level. Looking to the weekly chart, there is a gap at 1.848 that would be a target if 2 dollars is breached. RSI is currently near 22 percent, with a recovery not finding significant resistance until the 2.26 area. Tomorrow’s storage report is expected to show a 27 bcf build compared to the 5-year average injection of 49.
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