Chinese Daily Crude Imports Drop
In addition to a definitively overbought condition from the $15 June to early August rally, the crude oil market is undermined by news that Chinese daily crude oil imports posted the lowest readings of the year. However, Chinese January through July imports were up 12.4% relative to year ago levels and that should provide some cushion to prices. Cushioning crude oil against additional losses this morning is news that Indian July fuel demand increased by 1.9%, funds are returning to crude oil and fuel ETF instruments and long interest is surfacing off the potential for a seasonal increase in Gulf of Mexico hurricane activity. Another but less significant support for the bull camp is the announcement refill US strategic oil supplies. This week’s Reuters poll projects crude oil stocks to post a minimal decline of 200,000 barrels and an increase in the refinery operating rate of 0.5%. The danger of predicting a corrective setback in the crude oil market is the resiliency shown by the trade over the last several months. However, it should be noted that predictions of declining US seasonal fuel demand have surfaced already which in turn should make this week’s EIA US implied gasoline demand reading a very important statistic. In another major negative, US floating crude oil supplies in the Gulf of Mexico posted a week over week increase of 123% which clearly shows oil backing up in the US possibly because of unattractive flat prices exaggerated by strength in the US dollar. Therefore, we expect US crude to lose to Brent crude in the near term and for the tone of the crude oil market to be set by the soft Chinese trade data today.
We are suspicious of yesterday’s rally, being explained by a resurgence of hot temperatures returning to the East Coast especially with Bloomberg indicating last week US cooling demand was 1 degree day below normal. On the other hand, natural gas prices are extremely cheap, and the trade has consistently discounted prospects of late season tightening. However, there is chatter in the energy markets this morning of the beginning of the most active portion of the Atlantic hurricane season and that could provide added buying interest for natural gas today. Therefore, some short covering by a long-held net spec and fund short contingent is not surprising. Furthermore, the last 2 weekly storage reports have posted smaller than expected injections which gives credence to the supply tightening prospect. In short, fundamentals have turned positive but are hardly of the type to fully reverse a bear market trend. It should be noted that some fluctuation in Russian gas flows were documented last week and given the intensity of drone attacks by both sides in the war could result in Russia finally retaliating with a slowdown or halt of gas shipments through Ukraine into Europe.
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