Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex traded lower as concerns over economic activity following the CPI release grew more dire. Recent revisions downward in World Bank estimates had already warned of the potential for slower growth. Reports of renewed lockdowns in Shanghai along with the potential that higher interest rates and a tightening monetary policy would impede growth increased fear that demand would be adversely impacted. These developments helped draw attention from the supply side and inventory tightness back onto demand on fear that high prices and a contraction in economic growth would ease supply tightness in the petroleum complex.
The pull and tug of supply and demand is likely to remain intense, keeping volatility high. The talk of a return of lockdowns in China has once again raised economic uncertainty for one of largest consumers of energy with limited production. Actions since April have had a debilitating impact on demand, which many felt would ease quickly as lockdowns lessened. Today’s news has caught the market by surprise and lead to the better selling interest. As we have seen on substantial breaks recently, the market is still looking at supply tightness as a key consideration and these fears have only recently been magnified by the prospects for a strike action by Norwegian oil workers, the closure of some ports in Libya leading to the shuttering of some key oil fields, and the appearance that recent moves by Iran to remove nuclear monitoring equipment of the IEA has set back negotiations for a new nuclear agreement. In the background are concerns that OPEC excess capacity remains limited, providing support below the market.
Although upside potential for crude still exists, uncertainty presented by the Chinese lockdowns along with Fed policy impact on growth might provide a less enthusiastic view of the market in the near term, which could provide the basis for consolidation in the 116.00 area to this week’s high near 123.18 basis July.
Natural Gas
The market has traded erratically since the explosion at Freeport LNG on Wednesday. Prices tested down to the 8-dollar level yesterday as speculation over the extent of damage and possible duration of the shutdown flushed out nervous selling. Prices reversed following the weekly storage report that showed a 97 bcf injection. The build was in line with estimates but brough out buying interest as some had expected a triple digit increase. A reiteration from Freeport estimating the down time at three weeks added upside momentum as the 40-45 bcf of additional supply was considered to be offset by power demand from extreme heat expected in Texas through early next week. Decreased wind and a continuation of unimpressive production levels near 95 bcf/d also lent support as the market traded back up to as high as 9.149 today before ending lower by 11.3 cents at 8.85. With the 3 week estimates from Freeport maintained, the risk is for a longer than expected shutdown. Therefore the 9-dollar level likely remains solid resistance until the picture becomes clearer. Any increase in duration could lead to a quick retest of the 8-dollar area.
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