Written Commentary
CRUDE OIL
While conditions could change following series of upcoming US jobs related data points, the path of least resistance is pointing down in crude oil from ongoing demand concerns. Even the technical picture in the market could become very bearish with a September crude oil failure to hold the $90.00 level. Clearly the crude oil and gasoline markets saw the latest EIA weekly report as bearish as prices dove immediately after the release. In retrospect, the markets saw a much larger than expected build in crude oil stocks of 4.4 million to be more important than moderate declines in both distillate and diesel stocks. Going forward, the crude oil market should see less support from a 1.2% decline in weekly US refinery operating activity as that decrease the call on spot crude supplies.
Eventually the product markets should see support from a 1.2% decline in weekly US refinery operating activity especially with Bloomberg predicting the US refinery operating rate has “peaked”. Unfortunately for the bull camp, the reduction in product output is more than countervailed by a 700,000 barrel per day, a weekly drop in implied gasoline demand and more importantly because the year-over-year deficit in gasoline stocks has narrowed significantly since June. Furthermore, with the downside breakout in gasoline to the lowest price levels since early April, the trade is clearly discounting the bull case.
NATURAL GAS
While a slight mitigation of extreme heat in the US and some near-term but temporary relief in Europe offset a very bullish statement from the Russian national gas company Gazprom yesterday, the market might see more significant lift from talk of a nearing return of lost US export capacity. The Russian national gas behemoth yesterday indicated that sanctions “make return of the gas turbine impossible”. In short, poor natural gas price action following signs that the Nord Stream 1 pipeline might remain at 20% of capacity for the near term suggest the bull camp is more afraid of demand softening than supply tightening. While today’s EIA working gas in storage report might not prompt a significant reaction, extremely hot temperatures over the prior 2 weeks in US should provide a very modest injection.
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