Energy Brief for July 5.23
by market analysts Stephen Platt and Mike McElroy
The petroleum complex showed strong gains with crude settling higher by 2 dollars. The products outpaced the gains in crude with ULSD moving up by 12.60 cents and gasoline up 5.59 cents. The strength was tied to the move announced Monday by Saudi Arabia and Russia to maintain voluntary production cuts of 500 tb/d each into August. Although concerns persist over economic growth in China and the US, the appearance that the main OPEC+ producers will do whatever it takes to support prices helped encourage fresh short covering and renewed buying interest. Taken together the Saudi and Russian moves mean that the total output cuts pledged by members of the OPEC+ producer group total 5.16 mb, or about 5 percent of total demand.
Some support to values was also linked to reports that the US Navy had intervened to prevent Iran from seizing two commercial tankers in the Gulf of Oman on Wednesday with one incident involving a VLCC of Chevron and another in which shots were fired from the Iranian vessel. The pickup in violence suggests negotiations between the US and Iran for the lifting of sanctions are likely not going well and given the tension in the Gaza Strip between the Palestinians and Israel, Middle East geopolitical tension might be heating up. The DOE report that has been delayed until tomorrow due to the holiday will be a key consideration on demand trends for air and highway travel. Expectations point to a further decline of 1.8 mb in crude inventories and a drop of 1.1 in gasoline and a build of .5 mb in distillate inventories. Refinery utilization is expected higher by .2 to 92.4 percent.
Look for values to advance to the 75-76 level basis prompt crude. Production cuts by Saudi Arabia and Russia will likely exacerbate the production deficit expected in the 2nd half of 2023 despite the economic challenges apparent in China and the US.
Prices have pulled back over the last two sessions, with the August contract settling at 2.657 for a loss of 5.2 cents today. Production regained the 102 bcf/d level on Monday to initiate the weaker tone. Weather forecasts remain above normal, but minor downward revisions since Friday have weakened the resolve of bulls as we enter July with ample storage. The continuing recovery of Canadian exports to the US after wildfires had decreased flows over the last two months added to the weakness. LNG flows continue to recover and have exceeded 13 bcf every day in July. If these levels can continue to improve, they could underpin the market and rekindle the recent upside move. The weekly storage report, which is delayed until Friday due to the holiday, is expected to show a 63 bcf build which is in line with the 5-year average. With prices moving back below the 9 and 100-day moving averages, the near-term bias is down with 2.61 initial support and below there at 2.50. A recovery will find the first level of resistance in the 2.75 area and then at 2.89.
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