Written Commentary
CRUDE OIL
In a headline that might seem benign, the US has “resumed” imports from the Middle East after a 50 day hiatus. In our opinion that indicates a return toward normal and a slow unraveling of the severe supply bottleneck in the Strait of Hormuz. As we indicated yesterday, global energy markets remain vulnerable to consistent increase of ships transiting the Strait, while the US markets could see minimal residual support because of tight internal supplies. Along those lines, this week’s EIA report showed year-over-year deficits in crude oil, gasoline, distillates, and diesel inventories remain in place. Furthermore, and potentially the most telling sign of a potential reversal of bullish war fundamentals, this week’s key US export staging area of Cushing Oklahoma saw a 2.3 million barrel inflow which in turn put the facilities total inventory back above what is thought to be a shutdown zone of 20 million barrels. While a one off (one country) jump in UAE monthly seaborne exports is not a signal of a massive reopening of the Strait of Hormuz, those exports returned to pre-war levels! While the number of ships held back from transiting the Strait remains massive and shipping costs (including insurance) are sky high, Saudi Arabia has cut its Asian crude pricing to offset some of the high costs of delivering supply to China and others.
PRODUCTS
Reports of the first US crude oil imports from the Middle East in 50 days and a relatively high ongoing US refinery operating rate should dampen product price gains from renewed aggression by Iran. On the other hand, this week’s EIA report rekindles the bull case with product inventories continuing to contract and with year over year supply deficits generally expanding. Yet another near-term supportive factor is the looming last major driving holiday of the summer season, reports that Chinese driving activity remained strong and reports that Ukraine struck and damaged two refineries deep into their territory
NATURAL GAS
With the new “contract-low” yesterday and prices sitting right on those contract lows again today, the bear camp obviously retains control. However, with petroleum markets showing corrective strength, Iran reportedly launching fresh strikes and ongoing heat in Europe we expect upcoming declines to be incremental. On the other hand, weekly EIA natural gas storage report showed an injection of 33 BCF and in turn expanded the inventory surplus to 6.7% from several weeks of 6.4% surplus readings which should embolden the bear camp. Like the petroleum markets, the current view in the energy space is that ships are transiting the Strait of Hormuz and the number of ships transiting the Strait is likely to grow.
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