Written Commentary
Price Overview
The petroleum complex continues to attract good buying interest, particularly in crude. Ideas that global inventories are getting progressively tighter as demand recovers is underpinning the buying interest. How strong the recovery will be, along with the inclination of OPEC to increase output more than currently planned, remain key monitoring points.
The DOE report continued to show crude inventories coming down rapidly in the US as refinery operations recover. They fell by 7.4 mb to 466.7 compared to expectations for a draw of 3.3. In products the inventory situation was mixed with gasoline rising by 2 mb and distillate lower by 1.0 mb. Total crude and product inventories fell by 4.6 mb overall. Domestic production of crude was 11.2 mb, well below the levels seen prior to the pandemic. Refinery utilization was reported at 92.6 percent compared to 91.3 the prior week and 73.8 a year ago. Total Disappearance for all products surged to 20.6 mb from 17.7 last week and 16.5 a year ago. Gasoline demand reached 9.4 mb while distillate rose to 4.3 mb. Jet kero usage was 1.3 mb compared to only .8 mb last year. Lower net imports of crude helped offset some of the higher imports of gasoline from the favorable arbitrage with Europe.
Issues keeping supplies tight include the slow recovery in Libyan production, heavy maintenance seasons in the North Sea and Canada, and concern that shortages in steel and concrete along with governmental emphasis on renewables will limit investment decisions geared toward expanding the output of non-OPEC members. The Fed policy announcement today does not appear to have changed the current demand dynamics, and the tighter stock situation as the pace of economic growth appears to be exceeding expectations. The need for OPEC to expand output as non-OPEC producers appear unable to quickly ramp up output suggests a tightening situation, which will need to be addressed in coming months. In the absence of any action from the cartel to increase production, along with slow progress toward lifting export sanctions on Iran, we believe the market will hold support in the 66.00-68.00 range and move toward the 2018 highs near 76.90 in prompt WTI crude as stocks continue to be drawn down into the summer.
Natural Gas
Prices retreated over the last two sessions, with the July losing 11 cents yesterday and then probed down to an intraday low at 3.187 this morning before recovering as the session wore on. Cooler revisions to weather expectations yesterday initiated the selling interest, with the 15 and 45 day models both losing CDD’s. Profit taking was likely triggered on the way down as well with the market being technically overbought. Prices ended today’s session well off their lows as LNG flows continue to improve with the major terminals working through their maintenance issues, and exports to Mexico have returned to near 7 bcf/d. June has thus far seen record warmth that has been the underlying driver of the 45 cent rally since late May. With forecast still pointing to above normal demand for the second half of the month, the 3.40 level looks to be the markets next upside target. After being tested today the 3.20 area offers formidable support. Tomorrow’s storage report is estimated to show an injection of 72 bcf verses the 5 year average of 87.
Charts Courtesy of DTN Prophet X, EIA, Reuters
The authors of this piece do currently maintain positions in the commodities mentioned within this report.
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