Written Commentary
CRUDE OIL
Even though May crude oil has not posted a higher high this morning, bullish fundamentals remain in control with bullish supply and demand developments from earlier this week still echoing in the trade. However, European crude in storage jumped by nearly 5% this week, and the bull camp should be partially unnerved by a second straight week of EIA crude oil stock inflows above 3.1 million barrels. Furthermore, the year-over-year EIA crude oil stocks deficit narrowed from 25.4 million barrels to 18.5 million barrels which should have sparked some profit taking. However, the EIA report was very supportive from gasoline readings with stocks down by a much larger than expected 4.2 million barrels and the weekly implied gasoline demand reading jumping to the highest level since last October. Furthermore, the Bank of America raised its Brent crude price targeting by six dollars and has pegged the second and third quarter global oil deficit at 450,000 barrels per day which adds to the bullish buzz. However, the bull camp should be concerned with Chinese and Indian price shock reducing demand as both countries are likely to slow purchases in hopes of cheaper pricing. Taking a step back, energy demand expectations should be improving with better Chinese data, and perhaps more importantly the lack of rebuilding of US gasoline inventories in the wake of an 18% jump in the US refinery operating rate.
PRODUCT MARKET FUNDAMENTALS
This week’s EIA report was very supportive from gasoline readings with stocks down by a much larger than expected 4.2 million barrels and the weekly implied gasoline demand jumping to the highest level since last October. In fact, yesterday’s EIA report showed a noted draw despite the US refinery operating rate jumping by nearly 18% in less than two months. While the diesel market showed signs of catching up to the sharp gains in crude oil and gasoline, the market continues to lack a definitively supportive fundamental condition. Clearly, distillate stocks declined despite active refinery activity, but the implied distillate demand reading continues to track well below year ago and below five-year average levels.
NATURAL GAS
While the natural gas market made yet another higher high (the third straight) yesterday, the bull camp will face a high hurdle today with the market already expecting a noted withdrawal from EIA storage late in the season. We see the high bar for the withdrawal today the result of mostly mild temperatures and from a surprise injection two weeks ago. In fact, with two straight weeks of minimal withdrawals and a minimal injection last week, expecting a relatively large 36 BCF decline in inventories seems out of context. Furthermore, the northern hemisphere continues to move into the shoulder season where large draws on inventories are very unlikely.
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