Written Commentary
CRUDE OIL
While the crude charts have shifted bullish, the action feels like short covering instead of fresh speculative buying. Therefore, August crude might move higher in the May and June consolidation zone, but bearish fundamentals present significant headwinds. Bearish developments include across-the-board builds in API crude oil and product stocks, a weekly increase of 4.7% in European crude supply, and rumors that the Chinese national oil company has sold 8 million barrels of Oman crude so far this month. On the other hand, emerging Chinese government assistance for their economy should help cushion sagging Chinese energy demand fears especially with the markets now anticipating a reduction in Chinese medium-term interest rates. Along those lines China also overnight issued its 3rd tranche of crude oil import quotas. Furthermore, declines in the dollar could provide WTI buying against selling in global crude grades. Trade estimates for the EIA crude oil inventory reading today call for a moderate build after a surprise build in API inventories. In the near term, we expect demand for US physical crude will strengthen with the US refinery operating rate nearing 96% of capacity.
NATURAL GAS
The bull camp should be discouraged by the limited rally yesterday and by the slight setback early today following weather forecasts calling for a return to hot temperatures in the US in the 2nd half of June and perhaps more importantly from the lack of upside action following a prediction by Revinitiv that so far in June US production is running below last month’s record. Unfortunately for the bull camp, the markets saw gas flows to US LNG export plants declining so far this month, but that is offset by the hot 2nd half of June US temperature forecast. Last week, EIA working gas in storage posted a surplus of 16.1% versus the 5-year average which is down 6.1% from the end of April. Negative developments overnight also surfaced as the Chinese National offshore oil Corporation indicated that some of its import facilities remain idled and from expectations that recent gains in European prices will continue to attract supply thereby refilling strategic supplies. Temperatures look to warm steadily starting Saturday, but the trade only sees weather as a cushion not a catalyst for gains. Pushed into the market, we give the bull camp a slight edge, but market action is indicative of a market without significant upside potential.
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