Written Commentary
CRUDE OIL
While the rebound off yesterday’s latest new low for the move action has been limited in scope, many fundamental issues have shifted positive overnight. In addition to widespread signs Russian exports via ship and pipeline in August will decline, the markets are also expecting a noted decline in this week’s EIA crude oil inventories. Adding into the prospect for less oil flowing from Russia is expensive Russian pricing and signs of softer Indian purchases of the sanction restricted supply. However, demand signals from the US might be positive today if US retail sales gain as expected and the dollar breaks out down after US industrial production and capacity utilization figures are released. On the other hand, with disappointing Chinese economic news to kick off the week and crude oil overbought into last week’s high, the potential for downside follow-through today remains noted. Cushioning prices against sustained downside action is an increase in Russian oil export taxes (which could reduce exports), strong French oil product sales and ideas that Russian oil is becoming less attractive to Indian buyers. This week’s Reuters poll projects crude oil stocks to decline by a significant 2.3 million barrels with that result following last week’s massive 5.9-million-barrel inflow. On the other hand, a US refinery operating rate last week increase of 2.6% should keep the demand for physical crude on an expansionary track. In retrospect, the energy market appears to have overvalued the prospects of consistent improvement in global energy demand last week, especially given the downshift in the Chinese economy and in the face of global oil prices returning to the vicinity of the sanctions price cap. A forecast released yesterday predicted the global oil market will see a deficit of 2.3 million barrels per day in the 3rd quarter and at 1.8 million barrels in the next year.
NATURAL GAS
With a 2nd straight day of lows violating the psychologically important $2.50 level, the September natural gas contract looks to be headed lower. In fact, despite reports of record electricity generation in Texas and on the West Coast, traders are simply not interested in betting on a tightening of US gas supply. Last week the EIA report showed the smallest injection of the summer but only narrowed the surplus versus the 5-year average by 0.5%. Caveats to those aggressively pressing the short side of natural gas is the presence of an African heatwave drifting into southern Europe and ongoing record electricity demand in Texas and on the US west coast. However, we leave the edge with the bear camp with record heat in several geographically diverse areas failing to lift prices. However, weekly EIA injections continue to narrow and there is talk Europe will begin to renew efforts to refill storage to capacity levels before the area is presented with early cold threats.
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