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Energy Brief for July 25 2022

by Stephen Platt and Mike McElroy

Price Overview

The petroleum complex continues to attract buying on setbacks with values testing the 93.00 area in late Asian trade around midnight. The early weakness appeared to be in reaction to concern over the Chinese economy following reports late last week, the country had narrowly missed contracting in the second quarter; growing .4 percent year over year due to COVID-19 lock-downs, a weak property sector and cautious consumer sentiment. Additional selling was also linked  to reports the National Oil Company in Libya aims to bring back oil production to 1.2 mb/d in the next two weeks from near 860 tb/d currently; which were looked upon with some skepticism. Nevertheless supply concerns that remain in the background continue to reassert themselves as ongoing concerns in Europe over Russian supplies and the supply of diesel continue to offer support.  Talk of a price cap on Russian oil continue to circulate with Russia continuing to suggest that crude and products will be redirected to other countries if a price cap on Russian crude is adopted by major Western powers in the 4th quarter.

Although concerns remain over the recent weakness in US gasoline demand, signs that Asian and Indian demand has been stronger than expected remain in the background. In addition, concerns over the availability of diesel in Europe also appear to be rising given their heavy reliance on diesel cars and questions over the availability of this key fuel from Russia. The heavy reliance on global sources of supply from Russia to OPEC continues to generate good demand for wet barrels in the North Sea that has helped strengthen the premium of Brent to WTI for Sept to levels not seen since the war started;.This suggests that demand for US grades in the export market will likely remain strong.  

The questions over the future availability of Russian natural gas and oil to Europe as we approach peak hurricane season in the US from August through September and the need to build inventories ahead of winter will likely limit downside potential to near the 93-94.00 level basis September crude. For the most part it looks like the bulk of bearish news has been discounted in the absence of a global recession. Low inventory levels along with the uncertain global petroleum supply should continue to provide support near current levels and suggests the potential for crude to test the 109-110 level in the intermediate term.

The DOE report is expected to show inventories -1.1, distillate +.5 and gasoline -1.1 mb. Refinery utilization is expected +.3 % to 94.0 in the week ended July 22.

Natural Gas

Prices continue to surge to the upside as above normal temps over most of the US in the past week and forecasts for above normal temps in the 6-10 day forecast raise concern over storage levels as we move into the fall and in advance of hurricane season. In the background remains last week’s EIA report which showed a smaller than expected injection Although US gas production appears to be rising reaching 96.1 bcf/d  currently in July against a 95.3 bcf/ level in June, fears that the storage deficit against the five year average could rise further if summer heat remains oppressive appears to be boosting valuations. The failure of the Freeport outage to ease supply worries despite a sharp contraction in LNG exports suggests demand is still robust from other sources which is underlying the concerns over prevailing inventory levels and might provide the basis for a renewed test of the 9.00 level basis September and possibly 9.60 the contract highs. 

The authors of this piece do not currently maintain positions in the commodities mentioned within this report.

Charts Courtesy of DTN Prophet X, EIA, Reuters


Learn more about Stephen Platt here

Learn more about Mike McElroy here

Futures and options trading involve significant risk of loss and may not be suitable for everyone.  Therefore, carefully consider whether such trading is suitable for you in light of your financial condition.  The information and comments contained herein is provided by ADMIS and in no way should be construed to be information provided by ADM.  The author of this report did not have a financial interest in any of the contracts discussed in this report at the time the report was prepared.  The information provided is designed to assist in your analysis and evaluation of the futures and options markets.  However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.

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