Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex failed to follow through on sharp early gains that carried values near the 118 area in July crude. Nevertheless, a firm undertone prevailed throughout the session as the phase-in of a Russian oil embargo by the EU contributed to fears of a tight supply situation. Caution was also apparent ahead of the OPEC+ meeting taking place tomorrow following a Wall Street Journal report suggesting some members were exploring the idea of suspending Russia’s participation given the possible shortfall in their production levels. Such a move would pave the way for Saudi Arabia and the UAE to raise their output and make up for the shortfall. Russia has missed its production target for several months.
It appears OPEC+ will stick to the agreement at this meeting and raise their production target by 420 tb/d. The failure of some producers to reach their marks will keep compliance levels high and supplies tight, helping support the market. However, the need of some producers in the Middle East to preserve their alliances with Western Europe could lead to pressure in the months ahead to suspend Russia’s participation in the agreement, like those currently in force for Venezuela, Libya and Iran. How this might affect future negotiations to cut production when prices are low will also be a key consideration.
The discussion of such an option is a sign of cracks developing within OPEC as some members see an opportunity to expand production and take advantage of higher prices. Conversely, Russia has played a key role in supporting the power of OPEC given that it is the third largest producer of oil behind the US and Saudi Arabia. The US, who is not a party to the agreement, has been able to steadily expand output while members of OPEC+ have held back and in fact lost market share to heavily discounted Russian oil, such as in India and China, where it has not been sanctioned. The progress of these discussions will be a key price consideration over the next few months along with how any future agreements might be constructed.
Natural Gas
The market traversed a similar range over the last two sessions, losing in excess 50 cents yesterday and gaining the majority of it back today. The July contract ended at 8.696 for a gain of 55 cents. The initial losses were set in motion by solid production over the long holiday weekend, with lower 48 output just shy of 96 bcf/d. The selling gained momentum as the session wore on with the market closing near its lows. The sentiment was reversed this morning as early production numbers indicated a substantial drop to 93 bcf. Prices worked higher all day into a market with little in the way of price resistance on the rebound back through yesterday’s range. Record demand in Texas due to heat and a drop in wind generation added to the momentum. Tomorrow’s storage report is estimated at an 86 bcf injection, below the 5 year average of 100, which would further increase the overall deficit as we head into the summer cooling season. The 8 dollar level has held up to start the week and remains solid support. Today’s settlement through the 9 and 20 day moving averages could signal a near term test of the 9 dollar level, with a settlement through there opening the door for a test of the highs and possible run to double digits.
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