Written Commentary
CRUDE OIL
While there are several bearish developments facing crude oil prices this morning, the bullish bias remains in the market just under the surface. Residual negatives are yesterday’s smaller than expected decline in US crude oil inventories, softer Chinese traffic levels, indications the Saudis will raise prices to Asia and fear that a global surge in gasoline prices will soften demand. Other discounted negatives overnight are reports of a softening of global jet fuel demand and fear of a European central bank rate hike this morning. However, the equity markets are providing risk on optimism and the dollar is tracking lower leaving the bull camp with a short-term trading edge. While some traders suggested yesterday’s range bound action was off fear of the Fed, the rate hike was widely anticipated and prices throughout the markets showed little reaction to the US central bank action. However, the crude oil market is short-term overbought and has likely over-factored the improvement in demand expectations over the last several weeks. In fact, it is possible that both India and China are forward bought, following reports both countries have built strategic reserves. This week’s EIA report was slightly bearish as the decline in crude oil stocks was much smaller than anticipated. Crude oil imports for the week stood at 6.367 million barrels per day compared to 7.174 million barrels the previous week. The refinery operating rate was 93.4%, down 0.9% from last week compared to 92.2% last year and the five-year average of 89.7%. On the other hand, the US implied gasoline demand reading was strong providing a cushion to the petroleum complex. Furthermore, crude oil demand from exports was also supportive at 4.59 million barrels per day.
NATURAL GAS
With a 5-day consolidation high resistance zone extending without fail, the bull camp in natural gas lacks resolve and fundamental justification for an upside breakout. Clearly, concentrated extreme heat areas instead of heat over a broad area has discouraged buyers and emboldened sellers. To be fair, the breadth and magnitude of high temperatures has narrowed from their initial release last week and the addition of active weather systems flowing across the US reduces total cooling demand needs compared to clear, sunny and hot conditions. Furthermore, potentially supportive news from a 11.9% decline in Russian natural gas production in June versus year ago levels has failed to spark a rally leaving the bull camp wondering what it will take to establish an upward bias. With the tight coiling pattern in the natural gas extending yesterday prices appear to be poised for a key pivot into the end of month.
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