Energy Brief for May 19

Price Overview

The petroleum complex continued to trade under pressure after reaching as high as 67.06 basis July in Far East trade early Tuesday.  The decline since then has been sizable, with values reaching as low as 61.95 today on the decline in outside markets and dollar strength.  Weakness was also traced to several factors including reports that rising infections in Asia have forced lockdowns in Taiwan, Singapore, and Vietnam.  The news helped offset optimism over demand prospects in Europe and the US.

Other factors likely encouraged selling interest, including reports that an agreement with Iran might be near following comments by the Russian ambassador that significant progress had been made at reaching a new deal on restricting Iran’s nuclear development.  Reports that Chinese demand might contract given high stock levels also was in the background.  We also believe the uncertainty over OPEC’s production policies is working against ideas that higher demand will lead to declining stock levels throughout the summer and into the fall.  Recent reports from Petro Logistics that OPEC’s exports jumped by 1 mb/d so far in May look to have taken hold.  The ministerial meeting in early April had indicated that they would gradually return over 1 mb/d to the market between May and July with the collective production set to rise by 350 tb/d in May and June, and then 400 in July.  Overall OPEC is slated to return as much as 2.1 mb/d to the market by July.  This additional production does not account for potential output increases from Iran and Libya during this period. In addition, non-OPEC production should also trend higher due to the favorable prices.

As we have indicated, the rally of over 25 dollars per barrel that we have seen since November has for the most part priced in this expansion in demand, and prices could respond in a forceful way to marginal changes that either fall short or exceed expectations.  The supply side will also be key, and if OPEC reconsiders their production policies at the beginning of June and provide additional output it could temper the upside price response.  Of concern could be the Russian stance, given recent reports that their level of compliance has fallen below 100 percent.  For now, today’s low at 61.95 should be an area of support with recoveries into the 65.50-66.00 containing values to the upside.

The DOE report today had little impact with crude inventories building by 1.3 mb, gasoline off 2.0 and distillate down by 2.3. Total stocks were .2 mb lower..

Natural Gas

The market has given back its Monday gains and then some, as the July contract lost 9 cents yesterday and another 5 cents today to settle at 3.028.  The pullback lacked any significant fundamental input and appeared to be a correction of the overzealous rally and spillover from substantial weakness in the energy complex and commodities in general.  A slowing in LNG flows that has dragged on for over a week due to maintenance and other issues was a negative influence, but a pullback in production to under 91 bcf/d this week and Mexican exports holding above 6 bcf/d helped offset those concerns.  Weather forcasts since Monday’s higher revisions have decreased CDD expectations, but not in a substantial manner.  The 20 day moving average just under 3.00 held up to today’s selling pressure, with the 38 percent retracement of the April/May rally just below there at 2.98 a likely holding area on additional weakness.  Look for prices to regain there footing as we work through the upcoming warm temperate event and creep closer to summer.  Tomorrow’s storage injection is expected near 60 bcf verses the 5 year average of 86.

Charts Courtesy of DTN Prophet X, EIA, Reuters