Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil prices traded in a firm fashion settling +1.86 at 69.56 basis August WTI Crude. Underlying support appeared to have been provided by the DOE report which showed commercial crude inventories in the week ended 6/23/23 fell sharply by 9.6 mb. The sharp decline in inventories was precipitated by a sharp increase in crude export levels to 5.3 mb/d. The report raised concerns over prevailing inventory levels and the potential for recent productions cuts by Saudi Arabia that extend now to July to lead to a deepening supply demand deficit later this summer. Recent economic activity in the US showing a strong recovery in construction activity also provided background support.
The DOE report showed commercial crude inventories falling by a larger than expected decline of 9.6 mb with movement of 1.4 mb out of the SPR. Cushing stocks rose to 43.2 mb an increase of 1.2 mb from the prior week. Commercial crude inventories currently stand at 453.7 mb compared to 415.6 mb last year. Gasoline inventories rose ,6 mb and distillate rose .1 to 114.4 mb. Refinery utilization fell to 92.2 percent a decline of .9 percent. Total disappearance for crude and products was reported at 20.3 off from 20.9 in the prior week. Cumulative disappearance in 2023 for gasoline is currently up 1.5 percent while distillate is off 5.2 percent for 2023 from the prior year. Net exports of crude and products were 2.9 mb compared to 1.1 mb last year. On a cumulative basis net exports are up 475 percent from what they averaged so far in the similar period in 2022.
We continue to see the main factors influencing the oil market as the following:
= The economic prospects for China and the appearance that the recovery is slower than what it had been prior to Covid.
= The impact of higher interest rates in the OECD economies and the prospect for further tightening.
= Russian and Iranian availability
= Inventory levels in key markets in both Asia and the US and forecasts of an impending stock decline in the second half of the year.
Despite the uncertain interest rate outlook, we still look for an expansion in oil demand, and marginal increases in supply for the remainder of the year to provide support to values. Steady growth in demand from key non-OECD consumers such as India and China should offset the lackluster demand in OECD countries. Reports that availability from Russia has declined in June might provide background support if true. Negotiations between the US and Iran aimed at limiting their nuclear program appear to be moving slowly. The maintenance of the 1 mb cut in production by Saudi Arabia into July will continue to tighten supplies materially and help tighten inventory levels and underpin valuations later this summer with potential to push values toward the 75-76 level basis prompt crude.
Natural Gas
Prices traded on the defensive with prices settling down 12.1 cents at 2,668 basis August into the July expiration which settled off 15.3 cents at 2.603. The weakness in values developed despite high temps in many areas of the US and moving east with record highs projected. The weakness appeared to be linked to increased renewable generation in Texas due to sunnier and windier weather along with some weakness in LNG exports due to maintenance. With weather expected to be hot into mid July for a large portion of the Eastern US, we would look for renewed support to develop on further setbacks to the 2.50-2.55 level basis August as increases in exports to Mexico along with a pick up in LNG exports to Asia provide support. Any extension of the above normal temps past mid-July should provide the basis for a re-test of today’s high near 2.88 and potentially the 3.00 area on the upside basis August.
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