Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex traded higher, ignoring the OPEC+ decision to increase production targets to 648 tb/d rather than the 432 tb/d previously agreed on. Ideas that OPEC+ would supply considerably less oil than dictated by the current agreement for July helped encourage expectations that supplies would remain tight as many countries fall short of targeted production rates. This remains true especially for Russia due to sanctions, along with producers in Africa such as Nigeria and Angola where under-investment and supply chain challenges continue to restrain output. Although Saudi Arabia could boost production as much as 200 tb/d under the new agreement, it will fall short of anticipated demand despite signs the global growth rates will slow in the months ahead, particularly in China and Europe.
The concerns over tight supplies were magnified yesterday by the DOE report which showed commercial crude inventories falling by 5.1 mb despite a withdrawal of 5.4 mb from the SPR. Net crude import levels remain relatively low at 2.2 mb compared to cumulative daily average so far this year of 3.2 mb, and 3.0 in 2021. The low crude import levels have occurred at a time when product exports have surged to 6.4 mb/d from 4.6 a year ago. Overall net exports of crude and products totaled 1.4 mb/d in the most recent reporting week compared to net imports of 1 mb last year. Gasoline stocks fell .7 mb and distillate were off .5.
Although the petroleum complex is focusing on current low stock levels, the announcement by OPEC+ of increased production targets does suggest a softening in their alliance with Russia. In addition, a potential ceasefire in the Yemen civil war along with a meeting between Biden and MBS in Saudi Arabia at the end of this month suggest a potential for more production from the Middle East. This could lead to output gains in the months to come from both the Saudi’s and UAE that might benefit both countries and help calm inflationary pressures. These possibilities should provide resistance near the 120-level basis July.
Natural Gas
Prices traded on both sides of unchanged before eeking out a small gain on the day, settling 3.8 cents higher at 8.523 basis July. The support came from near record temperatures expected in Texas this weekend and into early next week, as power demand looks to push against all time highs. Although the overall US forecast is not out of line, the early heat in the South has intensified fears of a hot summer. The market had been uder fairly heavy selling pressure coming into the session after yesterday’s storage report showed a 90 bcf injection into stocks that was above estimates in the 80-85 area. Despite the miss, the deficit to the 5 year average increased to 337 bcf. Production continues to be unimpressive, dropping back under 95 bcf/d after the holiday weekend. The weather concerns along with stagnant production and solid LNG flows continue to keep a bid under this market. The 8 dollar level, which marks a 50 percent retracement of the rally since early May, remains solid support. The 8.68 area on the upside is the only level in the way of another test of 9 dollars.
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