Written Commentary
Price Overview
The petroleum complex maintained a firm tone but ended well off its highs as sharp declines in US crude inventories continued to buttress concerns over a growing deficit as demand expands. Reports that OPEC was looking at expanding their production by 500 tb/d were generally ignored on the belief that the modest increase will not be enough to offset the projected supply/demand shortfall expected in the months ahead. OPEC+ is scheduled to meet on July 1st to discuss the possible increase. Surprisingly, the market failed to react to comments from outgoing President Rouhani’s chief of staff that the US was prepared to make major concessions at the talks and that an agreement has been made to remove all sanctions on oil and shipping. Other participants, most notably the German Foreign Minister, are still suggesting that there are significant hurdles to overcome before an agreement can be reached.
The DOE report was the primary focus today amid the other uncertainties. The draw in commercial crude inventories of 7.6 mb was larger than expectations at 3.6, despite a pullback in refinery utilization to 92.2 percent from 92.6 last week. Gasoline inventories fell by 2.9 mb and distillates were up 1.8 against expectations for increases of .8 and 1.0, respectively. Total stocks including products fell 5.8 mb. Total product disappearance inched higher to 20.8 mb compared to 20.6 in the prior week and 17.1 last year. The sharper than expected draw in gasoline supported the crack on the expectation that mobility is only starting to expand which will further tighten available supplies.
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 continue to move toward the 2018 highs near 76.90 in prompt WTI crude as stocks continue to be drawn down into the summer.
Natural Gas
The price recovery was fast and furious as the market regained all of its lost ground over the last two sessions, with the August putting in a high at 3.406 today before settling the session up 7 ½ cents at 3.352. Weather reports have trended warmer, but not enough to justify the extent of the bounce. Much of the fanfare was linked to LNG flows returning to 11 bcf/d. With European and Asian prices steadily rising, the premium to Henry Hub continues to widen and support the belief that exports will push the envelope of full capacity this summer and into the fall.
Even though we are near maximum current flows, coupling that with record Mexican exports does not leave much wiggle room if temperatures remain above normal this summer in the US. With early July currently forecast to continue the warm trend, trade seems willing to chase higher prices. Any pullback from the rapid rally likely finds support near 3.30. Without much guidance from the charts above the 3.40 level, mirroring the May-June rally would put the next upside target near 3.60. This could happen faster than expected if above normal temperatures for early July materialize. Estimates for tomorrow’s storage report point to a 66 bcf injection compared to the 5 year average of 83.
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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