Written Commentary
Price Overview
The petroleum complex maintained a firm tone as optimism over demand continued to attract good buying interest, especially in crude. In the background were forecasts by Bank of America that values could reach $100 in Brent next year on pent up demand and more private car usage as public transport use lags and remote workers run more errands near their homes. The JCPOA negotiations were paused for 10 days following the election of hardline judge Ebrahim Raisi to the Iranian presidency. Reports that offshore storage has built in preparation for a deal allowing Iranian oil exports were ignored on the expectation that OPEC+ will move slowly toward adjusting production levels, despite the potential for increased exports of as much as 1 mb/d once a deal is negotiated.
Tropical storm Claudette caused little damage to oil rigs this weekend and operations should quickly get back to normal. Nevertheless, an active hurricane season is forecast and will need to be watched closely for future threats.
Ideas that global inventories are getting progressively tighter as demand recovers are underpinning the strong buying interest. How strong the recovery will be, along with the inclination of OPEC to increase output more than currently planned, remain key monitoring points.
The need for OPEC to expand output as non-OPEC producers appear unable to quickly ramp up output suggests a tightening situation, which will need to be addressed in coming months. In the absence of any action from the cartel to increase production, along with slow progress toward lifting export sanctions on Iran, we believe the market will continue to move toward the 2018 highs near 76.90 in prompt WTI crude as stocks continue to be drawn down into the summer.
The DOE report to be released Wednesday is expected to show crude inventories fell for the fifth week in a row, this time by 3.6 mb, with distillate expected up 1 mb and gasoline higher by .8 mb. Refinery utilization is estimated to have increased by .4 to 93.0 percent.
Natural Gas
The market continues to hold out for a sign of warmer temperatures before recovering. Weekend forecast revisions pointed to an overall decrease in CDD’s near term, which lead to weaker prices to kick off the trading week. An uptick in production to over 92 bcf/d this weekend added selling pressure, as did a dip in Mexican exports below 7 bcf. The weakness produced another new low for the recent sell off, as the active August contract traded down to 3.165, which nearly achieved a 50 percent retracement of the May-June rally. Although the positive setup for LNG exports this summer is likely priced in to a large degree, it remains an underlying supportive influence, and with the weekend producing a recovery in flows back above 10 bcf/d, it could signal that facilities are wrapping up maintenance. With early July currently expected to produce above average temperatures, the retrenchment may be running out of steam. Look for the 20 day moving average near 3.14 to hold up to any further weakening, while the 3.40 level remains the next upside target.
Charts Courtesy of DTN Prophet X, EIA, Reuters
The authors of this piece do currently maintain positions in the commodities mentioned within this report.
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