Written Commentary
CRUDE OIL
Even though September crude oil made a lower low and the lowest trade since July 13th overnight, we are suspicious of the potential for a dramatic increase in supply flow through the Strait of Hormuz as history tells us that Iran has indomitable conviction and can’t be trusted. On the other hand, it is possible that Iran has lost the ability to impede shipping and it is also possible that shipping companies have been forced to take the chance and attempt to transit the Strait. However, today’s EIA weekly report must show a shift away from tightening crude and gasoline supply in the US and a rebuilding of stocks at the Cushing Oklahoma (a pre-export staging area) to extend the late July and early August slide. In other words, we think the washout in crude oil is mostly an extraction of war premium as US fundamentals remain extremely tight and supportive of prices. Fortunately for the bear camp the nearby crude oil contract might retain as much of $11 of war premium and therefore we cannot discount additional large declines. Furthermore, OPEC crude oil production increased by 1.1 million barrels per day in July with Kuwait, Saudi Arabia and Iraq contributing to the expansion of output.
PRODUCTS
As indicated in the crude oil section this morning, the supply and demand condition in the US remains very supportive of gasoline and the distillate markets with distillate fundamentals slightly less supportive. Therefore, despite signs of a temporary double bottom from the ULSD charts, residual weakness in crude oil is likely to leave pressure on both gasoline and ULSD. However, today’s weekly EIA report is likely to take on added importance as the trade looks for signals of a shift from significant supply deficit in gasoline to real expectations that the deficit will begin to narrow. Yesterday afternoon the API report indicated gasoline inventories increased by 156,000 barrels while distillate inventories fell by 1.3 million versus week ago levels.
NATURAL GAS
The bull camp should be relieved that natural gas prices have not plunged following a restart of the damaged Pennsylvania pipeline. However, prices might be supported by ongoing hot temperatures throughout the US Gulf states. On the other hand, there are signs that natural gas supply will begin to move through the Strait, and a Texas pipeline has begun moving supply (that pipeline can move large volumes of gas from the important and oversupplied Permian Basin. It should also be noted that European gasoline prices fell overnight and with another bearish EIA weekly natural gas report tomorrow we expect to see fresh contract lows. In fact, if gas begins to flow through the Strait of Hormuz a large downside extension could be seen from the removal of a major supply concern in place for months.
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