Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex continues to trade in wide daily ranges with good underlying support as it works toward our 115.00 objective. Weakness early in the session appeared to be related to Chinese demand concerns as reports indicated that refinery throughput had fallen as much as 11 percent in April along with a decline in retail sales of 11 percent and industrial production of 2.9 percent. Good support developed on the pullback as supply issues moved into focus given the appearance that the EU was moving closer to an agreement on a phased embargo of Russian oil and increases in OPEC output levels remained anemic.
Although issues with the Chinese economy will likely persist as slowing sales of property and gas-powered vehicles undermines sentiment, reports that COVID lockdowns in Shanghai are beginning to ease does provide some hope despite policies in Beijing becoming more restrictive. The supply side will continue to be the main focus for price direction given the tightness in inventory levels, particularly for products, and further declines in Russian production as tougher sanctions by the EU and G-7 and the May 15th deadline to halt all transactions with Russian state-controlled oil companies take effect. With limited spare capacity in the global refining system, along with cutbacks in Russian deliveries of fuel oil, naphtha and gasoline, further tightness in crude and product markets is expected that should provide the impetus for price gains toward the 115.00 area in prompt WTI crude.
The DOE report is expected to show crude stocks higher by 1.5 mb, distillates down .8 and gasoline lower by 1.3 mb, while refinery runs are expected up .6 to 90.6 percent. The potential for larger SPR releases could help ease concern over supplies and potentially lead to better resistance above 115.00 if demand begins to show signs of weakening.
Natural Gas
Prices surged higher out of the gate this week as the June contract traded up to 8.183 before ending the day with a gain of 29.3 cents at 7.956. The main catalyst behind the strength seemed to be the continued heat in Texas as ERCOT was stressed over the weekend, with more heat in the forecast this week along with an expected slowing in wind generation. The early season warmth continues to raise fears of a hotter than normal summer combined with maxed out exports of LNG. Production has slowly shown improvement but seems to come in fits and starts as it regained the 95 bcf/d level over the weekend. Until improved output is seen on a consistent basis, the market appears intent on working higher. With the settlement today above resistance near 7.85, the door has been opened for another test of 8.50. Initial support should emerge in the 7.70 area.
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