Crude Demand Should Remain Strong

CRUDE OIL

Certainly, positive sentiment flowing from global equities, an interest rate cut by the Chinese central bank and global chatter of supply tightness gives the bull camp fresh impetus to start the new trading week. In addition to recent sharp contractions in US API and EIA crude oil inventories, the trade was presented with news of a 7% week over week decline in global crude oil in floating storage. Perhaps most importantly, weekly Asian-Pacific inventories declined by 15% and have reached the lowest level since March. In fact, with very strong Chinese refinery throughput and very high US refinery operating rates, physical crude oil demand should remain strong. However, Chinese demand news overnight is conflicted with Chinese oil imports in July up 17.1% versus last year while declining 16.1% versus last month. It should be noted that US crude oil gulf prices firmed at the end of last week, potentially adding to the argument that WTI has found solid support on the charts. While the Saudis could certainly cut production and exports even further, with oil prices holding above $82.00, that bullish argument should already be fully factored into prices. While the tropical disturbance maps are quite active this morning, the storm in the middle of the Gulf of Mexico is not yet fully organized or definitively rotating and may not have enough time or distance before landfall to become strong. However, on the other hand a significant strong system sits under Puerto Rico and while the track is expected to shift to the east, the storm should be monitored. In the near term, the biggest threat to the bull camp is further deterioration in macroeconomic sentiment brought on by strong equity market declines which in turn might be partially related to the relentless run up in US treasury yields.

NATURAL GAS

While some might consider last week’s EIA injection as a major bearish influence, adequate supply in the US is not the only source of bearish supply. As indicated last week, Europe continues to aggressively build its strategic storage of natural gas well ahead of typical seasonal timing, and that should allow for a complete refill prior to the beginning of heating demand. However, we remain incredulous with the ongoing uninterrupted pipeline movement of Russian gas through Ukraine into Europe, especially with the Russians aggressively attacking Ukraine’s grain transportation infrastructure. In addition to a hot weather system moving into the US, the natural gas market could see additional volatility later in the week as tropical storm activity is becoming very active. However, the oversupplied natural gas market has dramatically increased the importance of LNG exports to the bull camp, and a disruption of exports from storms would certainly back up inventories in the face of near record US production. Unfortunately for the bull camp, the net spec and fund short is not excessive yet but even then, without a fundamental shift of significance, it will be difficult to take control from the bear camp. The downward bias is easy to ascertain but the magnitude of downside is difficult given the likelihood of very narrow ranges ahead. Certainly, the bear camp has added risk with heat and a possible hurricane in the news this week.

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