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Crude Slips Into Corrective Mode


The crude oil market has slipped into a corrective mode with a 4-day low early today despite a large week over week 4.2% decline in global crude oil in floating storage. However, the Iranian oil minister has suggested their output will increase from 3.19 million barrels per day to 3.3 million barrels per day within the coming 10-days. Furthermore, Iran expects daily exports to rise above 1.4 million barrels per day and Cushing Oklahoma storage levels broke an extended pattern of weekly outflows with an inflow last week. On the other hand, both the US and UK officials have warned of the potential for commercial shipping attacks in Iranian waters in the Strait of Hormuz. While crude oil could have drafted support from the Chinese removal of foreign travel covid era restrictions, fresh concern toward a large Chinese real estate company offsets most positive Chinese demand news. It should also be noted that Kuwait has increased prices for Asian sales and the dollar continues to rise keeping demand for US and ME supplies suspect. Fortunately for the bull camp last week falling supply flows from Russian and Saudi Arabia were confirmed by plunging Middle East tanker rates. However, there are other positive supply and demand issues remaining in place from last week with a significant jump in US implied gasoline demand last week of 9.3 million barrels per day which is a 6-week high and in the top 7 demand readings of the summer. In what could become a negative future supply-side development, the US last week added crude oil to the SPR for the first time since June 2020. On the other hand, if the US is in a mode to refill its strategic supply that could support prices in the near term. The most recent Baker Hughes oil rig operating count showed oil and gas rigs were reduced for the fifth straight week with the reduction, the 14th reduction out of the last 15 weeks. Currently the total oil and gas rigs operating are running 14% below year ago levels, but US oil rigs operating held steady this week after declining for the last eight weeks.


Not surprisingly, the natural gas market fell back aggressively from last week’s spike high, which we think is a sign the trade is overstating the impact of an Australian LNG plant workers strike. A fresh negative overnight is a report on Bloomberg indicating German natural gas storage is 91% full compared with a 5-year average storage level of 75%. Even more bearish the EU pegged its storage levels at 89% full. The lowest storage Europe is Austria where supplies are 67% compared to 5-year average seasonal levels. In our opinion, US temperature forecasts do not show significant cooling demand needs ahead, and certainly not enough cooling demand needs to eat into a double-digit surplus stocks over 5-year average US inventory levels. Unfortunately for the bull camp, the US temperature forecasts out through August 19th shows hot temperatures isolated in the southern portions of California, Arizona, New Mexico, Texas, and Louisiana which in turn should equate to average national demand. Not surprisingly, the Russian national gas company continues to send steady gas flows through the Ukrainian pipeline to Europe. In a longer-term supportive development, the gas rig operating count declined by five last week, with the number of gas rigs operating down 16% year-to-date.


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