Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The crude oil settled 79 cents higher after weakness had developed early in the week in the aftermath of the Saudi announcement of a voluntary production cut in July of 1 mb/d. The pullback was surprising and reflected higher than expected supplies from Russia, Iran and Venezuela, expanding production in non-OPEC countries, uncertainty regarding Chinese and US demand due to weakness in the manufacturing sector, and comfortable crude inventory levels in key consuming countries. Today’s support developed despite reports that the Chinese trade balance was weaker than expected with export levels shrinking as manufacturers struggled to find demand abroad and domestic consumption remained sluggish.
Prices rebounded on ideas that the market will grow increasingly tighter and stocks will decline. The possibility that the Chinese government will inject additional stimulus given the sluggish recovery and the overall reduction in OPEC production levels should underpin values.
Look for values to advance near term toward the 76.00 level basis July. An increase in the July OSP for Saudi crude loadings 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. We continue to look for steady support to global oil demand as we move through summer as driving and air travel pick up. In addition, underlying support on pullbacks exists on the potential for SPR purchases, along with the apparent intention by the Saudis to support values and possibly extend their production cut and exacerbate a decline in global stocks in the second half of 2023.
The DOE report was a mixed bag. Commercial crude inventories declined by .5 mb compared to expectations for an increase of 1.5. Product stocks rose more than expected with gasoline up 2.7 and distillate up 5.1 mb. Total stocks of crude and products including the SPR rose sharply by 10.9 mb. Refinery utilization increased to 95.8, an increase of 2.7 percent. Total disappearance levels fell .2 to 19.2 mb with gasoline up modestly to 9.2 from 9.1 mb the prior week.
Natural Gas
Despite selling pressure early in yesterday’s session, the market has managed to consistently grind out gains, with today’s 6.7 cent improvement to 2.329 basis July marking the fourth straight higher close. Weather continues to attract speculative buying as warming into the second half of June has remained in the forecast, with the South Central region looking well above normal next week. Production has shown signs of contracting over the last two days, dipping near 102 bcf/d, helping support values with the assistance of continued poor wind generation. Tomorrow’s storage report is expected to show an injection near 113 bcf, well above the 5-year average of 100. Today’s close above the 9-day moving average is a near term positive with 2.42 the next target on the upside. With LNG maintenance continuing, it may be difficult for the market to push much beyond that level near term, especially if tomorrow’s build comes in above estimates. Initial support should surface at 2.25 and then at the lows near 2.136.
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