Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil settled 56 cents lower at 80.73 basis August. Early support was offered by heightened tension in the Middle East following attacks by Hezbollah on Israel and increased Ukrainian drone attacks on Russian targets including refining facilities, but lacked follow-through as the dollar strengthened. Demand was a mixed bag with Indian import levels showing gains of 5.7 percent in May from year ago levels, and fuel demand increasing by 3.2 percent from the prior month. China’s prospects remain mixed as the market slowly recovers from problems in the property sector and on the increased use of EV’s. In the US, disappearance levels remained stagnant at 19.9 mb/d, a gain of .2 percent, with gasoline disappearance off 1.2 percent at 9.4 mb/d. Inventory levels have come down as we move into the seasonally higher demand period in the summer. Delays in shipping due to Red Sea disruptions are being worked out, with afloat storage coming down as crude and products move into onshore facilities. The decline has helped widen the backwardation from weakness earlier this month.
The DOE report released yesterday showed US crude inventories falling 2.5 mb. Gasoline and distillate stocks fell 2.3 and 1.7 mb, respectively. Total stocks of crude and products surprisingly showed little change as other oils and propane offset declines in crude and other products. The larger than expected decline in crude stocks provided support to values. Refinery utilization fell to 93.5 percent from 95.0 the prior week. Total disappearance reached 21.1 mb/d compared to 20.9 last year. Gasoline disappearance was 9.4 mb, unchanged from last year. Net export levels of crude and products were 1.7 mb.
Further price increases will be contingent on whether demand strengthens more than currently expected, along with the direction of the war in the Middle East. In addition, commitments by Russia and Iraq to reduce output levels to compensate for previous overproduction will be watched. Given the Middle East situation and potential for inventories to be balanced in the second half of the year, values are likely to consolidate in the 78-82 cent range basis August.
Natural Gas
The market has been a roller coaster ride this week. Monday’s gap lower was filled at midweek as the active August contract tested 3 dollars but failed to maintain the gains as prices settled over 13 cents lower yesterday and slipped another 1.8 cents today to end the week at 2.836. Weather continues to push the market in both directions, with downward revisions in CDD expectations turning prices lower yesterday. Today’s delayed storage report showed a 71 bcf injection, slightly above estimates near 69. Prices saw further slippage after the release but managed to claw back those losses into the close. The battle continues to be waged between extremely warm temperatures and excessive storage levels, with expectations for increased production into July aiding the bears. The active start to hurricane season has also acted as an overall negative, as demand destruction and potential LNG disruptions outweigh the possible output losses. Today’s settlement came in just below the 200-day moving average and could signal near term follow-through to the downside. Support rests near 2.78 and then 2.71. With the upside traversed multiple times this week, a rally will find scattered resistance until the 2.98-3.00 range, which marks the 9-day moving average and psychological resistance. A settlement above 3 dollars will be necessary to reignite any hope for a sustained summer rally.
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