Written Commentary
CRUDE OIL
With the range up action at the end of last week, crude oil prices posted a rally of nearly $6.00 primarily because of the 500,000 barrel per day production cut by Russia. Furthermore, according to the Russian Deputy Prime Minister, the risk of additional declines in Russian oil output later this year should not be ruled out. While Russia has indicated the production cuts will be limited to oil, they also announced efforts to limit crude price discounts with their Urals price at times at a $34 to $20 discount to Brent crude oil. However, just as EU price caps are largely ineffective, Moscow’s attempt to limit discounts to those ignoring sanctions would be similarly difficult to enforce. Unfortunately for the bull camp optimistic energy demand views from the prior 5 trading sessions are likely to be challenged with Tuesday’s US CPI reading. In other words, petroleum prices are likely to react to big picture macroeconomic headlines, with the trade already partially embracing a theme of improving global energy demand. However, the crude oil market should benefit from a large 9.5% week over week decline in global crude oil in floating storage. In a slightly bearish longer-term development, US oil rig drilling activity in the most recent Baker Hughes report showed the largest one week increase since last June. With 609 US oil drilling rigs operating compared to just 516 rigs a year ago, over time US production and supply will rise unless the dollar weakens and gives the US a significant price advantage in Asia. Given the positive market view toward Chinese demand, the OPEC Secretary General’s comments over the weekend predicting global oil demand will reach pre-pandemic levels this year at 102 million barrels per day adds to the demand positive trade, even though most forecasters expect China to account for virtually all global demand increases.
NATURAL GAS
In retrospect, we are very surprised that natural gas prices managed to hold consolidation support last week with mild temperatures on both sides of the Atlantic, a normal seasonal weekly withdrawal from EIA inventories and evidence of ongoing Russian Gazprom shipments through Ukraine on Sunday. While reports on the restart of the disabled Freeport LNG export facility have been rumored for months, the company indicated they resumed shipments on Sunday moving supply for the first time since June 8th. Therefore, a 5.5% week over week increase in net flows to US LNG export terminals could be the beginning of a narrowing of US gas in working storage surplus readings to year ago levels. While the COT positioning report has been delayed due to mechanical issues at the CFTC, we expect the net spec and fund short reading is at the largest level of the last 3 years and the recent consolidation could be balancing that oversold technical signal. While the restart of the US export facility could begin to tighten US inventories in the weeks ahead, without below normal temperatures, the increase in exports might not offset a building backlog of US supply.
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