Market Bias Down For New Trading Week

CRUDE OIL

Despite favorable global equity market action overnight, energy demand fears are surfacing in the wake of an avalanche of disappointing global manufacturing PMI reports. In our opinion, the source of the recent grind higher has been relief of the passing of the Fed hike, supportive US weekly oil inventory stats and news that US oil production in May fell slightly. Unfortunately for the bull camp, the trade was also presented with two negative supply-side developments overnight following a report that Russian crude oil output increased in June to 9.78 million barrels per day and news that crude oil in global floating storage increased by 4.2% over last week. However, overnight a tanker tracking estimate pegged Saudi July oil movement reached the highest level since April 2020 because of significant shipments to India and China.

The path of least resistance is pointing up in gasoline following a recent series of higher lows and higher highs with the sharp range up breakout and reversal from the high of $0.12. However, last week’s EIA gasoline report was bullish with stocks declining more than expected and the deficit to year ago levels expanding. It should also be noted that implied gasoline demand last week of 9.2 million barrels per day provides the market with evidence that demand might be holding together despite several weeks of market dialogue claiming sharper than normal seasonal demand declines. In an indirect negative, Russia appears to be ramping up refinery activity, perhaps because crude oil backing up from the embargo is filling domestic storage capacity quickly. Therefore, it is possible that Russian sales of products to countries like China and India will pick up ahead with Russia expected to offer significant discounts. With the market recently shifting its bearish US gasoline demand views toward more upbeat prospects, it is likely that gasoline prices will show a general correlation with action in the equity markets.

NATURAL GAS

According to the Russian national gas company Gazprom, their gas flow as of July 31st through the pipeline via Ukraine was running at levels of 42.20 mcm of gas (20% of capacity), but over the weekend Russia cut off gas supply flow to Latvia. Apparently, the market is not supported following news of lower production and exports from the Russian national gas company in the first 7-months of 2022. On the other hand, the focus on softening Asian gas demand is likely the primary factor driving prices lower today, even though Australia is considering restricting natural gas exports to ensure adequate domestic supply without surging prices. Over the weekend, EU officials continue to press for a reduction in consumption which is obviously a negative demand issue even if reductions are likely to be incremental. In our opinion, even if the EU manages to reduce consumption (unlikely), ongoing efforts to build storage to targeted levels ahead of winter should keep purchases/imports via the US strong. Even though US gas drilling rig expansion has been slower than in petroleum rig activity, it continues to recover and will eventually diffuse fears of tightness.