Written Commentary
Price Overview
The petroleum complex traded higher, bolstered by the API and DOE inventory reports. Although some caution remained apparent in response to the rising lockdowns and restrictions linked to the Delta variant, the underlying fundamentals ahead of the OPEC Ministerial meeting scheduled for tomorrow suggests that hopes for a broader recovery in demand remain intact as economies open up and travel continues to increase. The Secretary General of OPEC indicated that demand was expected to rise by 6 mb/d in 2021, with 5 mb/d coming in the second half of the year. Despite the brighter outlook OPEC suggested some caution was warranted given that the full unwinding of output cuts would provide the basis for a potential oversupply if they were reversed by April 2022.
OPEC data for June showed an increase in output of 740 tb/d compared to May. The biggest increase came from Saudi Arabia at 500 tb/d as it unwound its voluntary cut and raised output as part of the June 1st output boost. Iran has reportedly exported 600 tb/d in June while exports from Nigeria and Venezuela also showed increases. A key consideration remains whether Saudi Arabia and other OPEC producers are ready to accommodate potential increases from Iran that could total 1-2 mb/d.
The DOE report showed crude inventories fell by 6.7 mb/d verses expectations for a 4.7 mb draw, while gasoline rose by 1.5 and distillate fell by .9. Cushing inventories were reported at 40.3 mb compared to 41.7 last week, 45.6 last year and 52.5 two years ago. Refinery utilization was 92.9 percent versus 92.2 last week and 94.4 in 2019. Products supplied totaled 20.9 mb compared 20.8 a week ago and 18.1 a year ago.
The market will be focused on the result of the OPEC+ meeting tomorrow. We believe they will continue for now to take a disciplined approach toward returning production back to the market. Reports that Russian output levels did not change might make it easier to come to a consensus on how quickly output increases might be pursued. Currently most analysts expect a production increase of 500 tb/d for August but more important will be how quickly they are prepared to increase production if current deficit forecasts of near 2 mb/d for the 4th quarter are maintained. In the background remains the lack of strong increases in US shale production to counter the disciplined approach of OPEC.
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 as stocks continue to be drawn down throughout the summer.
Natural Gas
Price strength was maintained over the last two sessions as the August contract settled with a gain of two cents today at 3.65 after spiking as much as 12 cents higher intraday. The volatility has followed recent extreme heat in portions of the US that has spurred above normal demand. With these events coinciding with continued strength in overseas LNG prices and a recovery in US exports, the path of least resistance has been upward. Recent slowing of production to under 91 bcf/d added underlying support as output appears unable to maintain any steady increases at the moment. The recent volatility has pushed the market into overbought territory, and its inability to close in the upper end of its range over the last two sessions may indicate that a retrenchment is in order. Look for the 3.55 area to offer initial support on any pullback, and below there the 3.49 level would mark a 50 percent retracement of the rally since June 21st. With the current demand set up and continued warm temperatures, look for the rally to ultimately continue with the 4.00 level the next upside target. Tomorrow’s EIA report is estimated to show a 68 bcf injection verses the 5 year avearage of 65.
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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