Mideast Tensions Raise Supply Concerns

CRUDE OIL

September Crude Oil was slightly higher overnight, extending yesterday’s sharp rally off concerns about an expansion of the conflict in the Middle East in the wake of the killing of a Hamas leader in Iran on Wednesday. The market has staged a sharp reversal and has put aside its concerns about Chinese demand. Yesterday’s weekly EIA report was also supportive, with US crude oil stocks falling more than expected last week. Gasoline stocks fell more than expected as well, but distillates increased rather than increasing as expected. Implied gasoline demand was slightly lower than the previous week, but that week’s number was the highest of the year so far. OPEC+ meets today, and it is not expected to make any changes to its plan to start unwinding production cuts in October. The Caixin PMI showed China’s manufacturing activity shrank in July for the first time in nine months, confirming official data from yesterday. This keeps alive concerns about demand, even though it has been pushed to the background this week. The dollar fell yesterday after the FOMC meeting kept alive expectations for a Fed rate cut in September, and the weaker dollar is supportive to oil. The Bank of England cut rates overnight, which supported the dollar, but the rate cut could also benefit energy consumption.

Here are some highlights from the EIA report:

• Crude stocks -3.4 million barrels last week versus -2.3 million expected.
• Gasoline stocks -3.7 million vs -1.4 million expected.
• Distillate stocks +1.5 million vs -1.5 million expected.
• Refineries -1.5% to 90.1% versus 0.4% to 92.0 expected.
• Crude imports 6.95 million bpd vs 6.87 million the previous week.
• Crude exports 4.92 million bpd vs 4.19 million the previous week.
• Implied gasoline demand 9.25 million bpd versus 9.46 million the previous week and 8.84 million a year ago

September Crude Oil may set back today after yesterday’s steep rally, unless tensions escalate further in the Mideast.

PRODUCT MARKETS

RBOB and ULSD both rallied  yesterday off Mideast tensions and saw mild extensions overnight. RBOB may have gained additional support from the EIA report, but ULSD rallied despite a surprising jump in stock levels.

NATURAL GAS

Ample Supply VS. Hot Weather

Ample supplies are keeping a lid on natural gas prices despite warmer than normal temperatures and higher than usual cooling demand that are expected to dominate the Lower 48 over the next week. The 6-10-day and 8-14-day forecasts do show an area of below normal temperatures expanding from the upper Plains and Great Lakes to eventually cover the eastern two-thirds of the northern half of nation. For the EIA report today, the trade is looking for an increase of 27-45 billion cubic feet as of last Friday. Last week’s report showed US supply was running 8.4% ahead of a year ago and 16.4% ahead of the 5-year average. The EIA monthly report put US dry natural gas production at 3.142 billion cubic feet in May. This was down 2.1% from a year earlier but was the second highest for the month of May since 1973, when they first started tracking dry gas production. However, it was also the third straight month that production was down from the previous year and it was third straight monthly decline.

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