Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex traded sharply higher overnight following the surprise announcement by Saudi Arabia at the OPEC+ meeting that they would cut production voluntarily by 1 mb/d to 9 mb/d in July. However, the strong gains which took values to over 75 dollars per barrel at the opening could not be maintained, as the July crude settled just 41 cents higher at 72.15. The loss of upward momentum was predicated on downside risks to the market linked to continued higher than expected supplies from Russia, Iran and Venezuela, expanding production from non-OPEC countries, uncertainty over Chinese and US demand due to weakness in the manufacturing sector, and comfortable crude inventory levels in key consumers such as the US. Nevertheless, the move does double the effective physical reduction in supply which has been apparent since October and should underpin values, particularly if inventories are drawn down as forecast. Some blow-back to the move by Saudi Arabia might also have been linked to allowing the UAE to raise output targets by 200 tb/d to 3.22 mb/d, which was offset by Russia and other smaller producers cutting their quotas to put them in line with actual production levels.
Despite the inability to maintain upside momentum following the Saudi announcement, we still see potential in the near term toward the 76.00 level basis July. An increase in the July OSP for Saudi crude of .45 to a 3.00 premium to Oman/Dubai might attract Asian demand for not only Russian crude but also US WTI. Economic uncertainty in China and the US remains a key driver of bearish sentiment, but offsetting that negative tone is the potential for an increasing pace of economic recovery in Europe, Japan, and other Asia countries. US labor conditions remain solid and should support consumer spending and drive increases in debt once credit conditions stabilize. Look for steady support to global oil demand as we move through summer as driving and air travel pick up. In addition, there is underlying support to values on further pullbacks due to potential SPR purchases, along with the apparent intention by the Saudis to support values. The unilateral cut in supplies undertaken this weekend should exacerbate the decline in global stocks expected in the second half of 2023.
The DOE report on Wednesday is expected to show crude stocks rose 1.5 mb, with distillate and gasoline rising 2.2 and 1.5 mb respectively. Refinery utilization is expected at 93.6 percent, an increase of .5 from the prior week.
Natural Gas
Demand expectations improved over the weekend as forecast models began showing more heat in the 10-15 day period, and the changes were enough to rally prices despite other negative influences. The July settled with a gain of 7.3 cents at 2.245. Production remained strong while LNG loadings dropped below 12 bcf/d on increasing maintenance, but the market looked past those issues for the time being. Continued poor wind performance and coal to gas switching supported a strong gas share of the power burn and helped offset the negatives and support the move higher. If forecasted heat continues to develop, look for the bounce to continue with 2.35 marking initial resistance and beyond there 2.43 would be the next target. If the heat begins to revise lower, support should surface in the area of last weeks lows near 2.136, and a push below there would likely lead to a test of 2 dollars.
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