Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex traded on the defensive as demand concerns ahead of the interest rate hike by the US Federal Reserve encouraged long liquidation.
Some pressure on values was also apparent on the DOE report which showed a build in commercial crude inventories totaling 2.0 mb while gasoline showed a draw of .7 and distillate saw inventories increase by 1.3 mb. The SPR was drawn down by another 7.7 mb. Domestic crude oil production reached 12 mb a small increase over last week’s level of 11.9 mb. Net export levels of crude and products totaled 1.3 mb consistent with recent export levels. Exports of crude rebounded from last week and reached 3.7 mb. Total disappearance was indicated at 19.7 mb compared to 20.2 mb in the prior week. Gasoline disappearance was indicated at 9.1 mb putting the four week average at 9.0 against 9.1 last year.
The early weakness in the complex reflected the ongoing fears over a contraction in economic activity given the Fed stance toward a tighter monetary policy and the uncertainty over the Chinese economy. Given today’s breakdown to the 116.00 area, the challenges on the demand side look to be discounted. Forecasts that demand will rise by 2 percent in 2023 by the International Energy Agency continues to suggests a tighter inventory situation. Although economic fears persist it does not appear to be enough to offset the limited recovery in production by OPEC along with the impact that sanctions will have upon Russian production levels and uncertainties linked to Libyan flows and weather this Hurricane season.
For now, we still see the potential for some consolidation in the 116-123 range basis prompt crude.
Natural Gas
The announcement from Freeport LNG yesterday that operations would not resume for 90 days brought out heavy selling that pushed prices to a test of the 7 dollar level. Further indications that full operations may not resume until late in the year revised the potential domestic bcf increases from initial estimates in the 40 to 45 bcf area to the 150-250 range now. Considering this likely boost to US storage levels, the sharp losses are for the most part justified. The market saw some recovery today as weather revisions trended warmer with June already on pace to be the hottest on record. Production has also pulled back over the last few days to the 94 bcf area, adding underlying support. Tomorrow’s storage report is estimated at a 91 bcf injection verses the 5 year average build of 79. Today’s recovery to a settlement at 7.42 corrects some of the overdone nature of yesterday’s selloff and reflects the uderlying supportive fundamentals mentioned. The spike low at 7 dollars should offer solid support in the absence of any extension of the Freeport shutdown, while the newly improved End-of-Season storage levels likely cap rallies in the 8 dollar area unless the current extreme heat is maintained well into July.
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