Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex ended higher on the session following early losses linked to the API report late yesterday that showed an increase in US crude inventories of 3.6 mb. In the background were economic concerns following weaker than expected industrial production and retail sales in China, along with slower than expected retail sales in the US. Good buying interest developed against the 70.00 level basis June as the prospect for additional purchases to rebuild the SPR along with ongoing production disruptions in Canada and Iraq limited selling at the lower levels ahead of the DOE release. Forecasts by the International Energy Agency suggesting that demand would outpace supply by as much as 2 mb/d in the second half of the year also aided sentiment.
The DOE report had minor effect on the market despite the surprise increase in commercial crude inventories of 5 mb, with 2.4 pulled from the Strategic Petroleum Reserve. Stocks at Cushing rose 1.5 to 35.5 mb. Gasoline stocks fell 1.4 mb while distillate built by .1. Overall stocks of crude and products rose by 7.6 mb. Refinery utilization rose 1 to 92 percent. Total exports of crude and products were 1.9 mb/d compared to 1.6 last week. Disappearance rates remained subdued at 19.6 mb, with gasoline at 8.9 mb.
For now, economic concerns will be a headwind to prices, but the likelihood of gasoline disappearance recovering into the summer along with Chinese stimulus should help underpin a tighter stock situation, which will be magnified if purchases to rebuild the SPR come closer to reality later this year. Production shortfalls and improving demand prospects suggest that downside potential is limited. Look for a retest of the 74.00 area near term, and potentially the 100-day moving average near 76.50 as concern over raising the debt limit runs its course in the US.
Natural Gas
The market has worked hard to maintain the upside momentum initiated by last Friday’s large rig count decrease. Prices made a run at 2.50 yesterday, topping out at 2.47 before retreating to near unchanged levels. Another push upward today ran out of steam late in the session as the market closed with a small loss at 2.365 basis June. Support emanated from the weather, as heat in the Nortwest looks to move Eastward, raising awareness of the approaching summer and increased CDD potential. Decreased imports from Canada due to wildfires remained a supportive background influence as well. The struggle to hold gains was the result of the impending storage report, with the expected 108 bcf build likely the first of multiple triple digit increases in the coming weeks. LNG flows also worked against the rally as a sharp drop under 12 bcf yesterday raised concern over when maintenance will begin to wrap up. The 2.50 level remains a key inflection point, with a settlement above there needed to fuel further upside extension. Initial support is now near 2.30 and below there the 9-day moving average comes in at 2.26.
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