Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil prices settled 70 cents lower at 79.23 following strong gains yesterday. The strength reflected short covering ahead of the OPEC+ virtual meeting scheduled for June 2nd. Expectations that they will keep voluntary production cuts of 2.2 mb/d given builds in inventories over the past two months encouraged buying. Today’s weakness reflected talk that Saudi Arabia was looking to lower their OSP to Asia in July, the first reduction in five months, due to weakness in margins and Middle East benchmarks on increased competition from Russian and US crude valuations.
Uncertainty persists as OPEC+ discussions have turned to production capacity for its member countries for the calculation of output targets. Previously, members had reported their own capacity figures. To diffuse disagreements over targets the group has tasked three independent consultancies to assess member capacity by the end of June, which could have a bearing on future production allocations after current cuts expire at the end of 2024. While it is unlikely to have a bearing on the extension of current voluntary cuts at their meeting on June 2nd, it could affect how long cuts are in effect. Depending on national objectives, the discussions could be complicated given that some members might want higher prices and lower output, while others may be prepared to tolerate lower prices and higher output.
Given recent increases in inventories, the market is likely to be focused on the delayed DOE report scheduled for release tomorrow. Crude inventories are expected to decline by 1.9 mb/d, while gasoline and distillate are expected to have increased by .1 and .4 mb respectively, with a focus on gasoline disappearance levels due to the start of the summer driving period. Refinery utilization is expected up .2 to 91.7 percent.
It will be interesting to see how OPEC+ reacts to global oil demand growth, which has led to a wide divergence between their forecasts compared to IEA expectations. It is expected that voluntary cuts totaling 2.2 mb/d on top of earlier reductions of 3.66 will remain in force until the end of 2024. The actions have been in response to expanding production in the US and other countries resulting in a declining market share for OPEC. Demand concerns linked to rising EV use and slower than expected economic growth in China remain in the background as limiting factors. A rolling over of current cuts will help maintain a balanced market and stable values in the low 80.00 range as the market assesses the degree of stock drawdown in the second half of the year.
Natural Gas
The market continued to lose ground following the long holiday weekend, with the July trading down to an intraday low at 2.655 before closing 15.9 cents lower at 2.666. The expiration of the June contract added volatility to the session, but the main cause of weakness was a recovery in production, as it reached as high as 99 bcf over the weekend. Weather was a minor negative as overnight forecast revisions decreased demand expectations, although total Cooling Degree Days remained above normal for this time of year. The large storage overhang is also a restraining factor, with tomorrow’s weekly report expected to show a build of 78 bcf, below the average for this time of year at 104. A number in that area would still leave stocks 26 percent above the 5-year average. Prices retraced 50 percent of the May rally, with the next support level at the 20-day moving average near 2.63 and then at 2.60. A recovery will find little resistance until the 2.83 area, which marks the convergence of the 9 and 200-day moving averages.
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