Energy Brief for June 29 2022

by Stephen Platt and Mike McElroy

Price Overview

The petroleum complex failed to follow-through on early strength as WTI showing losses of nearly 2 dollars while gasoline and heating oil experiencing much sharper pullbacks as high refinery throughput helped ease tightness in products but squeezed available crude supplies. Caution was also apparent as the OPEC+ meeting progressed. Reports suggest the increase in production of 648 tb/d for August will be maintained but concerns over the level of sustainable capacity continue to be expressed. The DOE report also kept the market cautious following its release as crude stocks continue to be drawn down and product stocks build as refinery utilization encouraged was encouraged by high margins.

Values continue to be torn between supply and global economic concerns. US consumer confidence dropped to a 16-month low as inflation raised fears of a significant slowing in the economy and possibly push it into recession. This continues to be counterbalanced by supply side issues. Fears OPEC capacity is limited were buttressed by reports that the UAE leader had expressed concern to French President Macron that they are reaching the limits of their sustainable production capacity covering the next six months while the Saudi’s might be able to increase another 150 tb/d. These levels are far less than what many had expected, including this analyst. Ideas that Russian sanctions will only aggravate supply tightness in the months ahead remains in the background.

The DOE report did little to dispel these concerns despite the sharp downside movement in products. For the week ended June 24^th the report showed commercial crude inventories falling by 2.8 mb despite a draw of 7.0 from the SPR. Product stocks continue to build rising 2.6 mb in gasoline and distillate as refinery utilization reached 95 percent. Excluding the 7 mb draw in the SPR, total stocks fell .6 mb/d. Exports of crude and products remained robust at 1.1 mb. Total product disappearance remained near 20 mb/d against 20.9 a year ago suggesting some restraint on the demand side.

The pullback in August crude from a high near 114.00 toward the previous resistance at 111.00 was surprising but given the weakness in products is understandable. The push lower in products could lead to some tempering of inflationary pressures and likewise recessionary fears if refining margins move back toward more normal levels and consumer expenditures drop. Whether this is enough to ease global crude oil supply concerns without some progress in the Iranian nuclear talks is likely to limit downside pressure on crude to the 109.50-110 level with expected resistance still in 115-116 area basis August.