Written Commentary
CRUDE OIL
With a minimal higher high for the move, the bull bias is moderated by a $2.57 setback from the initial high. Nonetheless, the bull camp should garner confidence from a 4.6% weekly decline in global floating storage of crude oil with the biggest declines registered in Asia, the Middle East, and Europe. Not surprisingly, US Gulf Coast floating storage saw the echo impact from the decline in global floating storage, with a week over week increase of 123%. However, September crude oil overnight traded to the highest level since November 2022 likely from confirmation of OPEC+ (mainly Saudi Arabia) they intend to keep supplies balanced. In the mind of OPEC members, balanced effectively means “tight.” Therefore, seeing Saudi Arabia indicate they could extend and deepen production cuts pushes users to cover forward needs and speculators to return to the long side as that actively provides a price “put.” Developments from the Black Sea add to the bull case as does the increase in Saudi selling prices for September delivery to Asia and Europe. In fact, it appears that Ukraine military efforts are specifically targeting Russian crude/energy shipments and infrastructure. Longer-term additions to the bull case include eight straight weeks of reduced US drilling activity with a decline of five rigs which is 105 rigs below year ago levels. Furthermore, oil rigs alone fell by five and are at the lowest level since March 2022. Yet another bullish development came from the EIA which indicated US oil production fell to 12.66 million barrels per day in May, the lowest since February, and they also indicated the lower production is likely a sign that persistent reductions in rig operating counts are finally beginning to show up in US production numbers. A minor supply glitch was seen over the weekend with a Russian oil pipeline to Poland damaged with flows projected to resume early Tuesday. From the bullish demand side of the equation, the Indian oil minister indicated his country’s energy consumption is growing at 3 times the global average rate perhaps because reduced Indian fuel taxes have helped make fuel more affordable to consumers. Looking ahead, China will report its monthly trade data on Tuesday (reportedly) and that will likely provide volatility to oil prices with the trade already factoring in strong Chinese oil import demand.
NATURAL GAS
While the odds favor a continuation of sideways chop in place since the end of March, the fundamental path of least resistance is pointing down. Certainly, the natural gas market has managed an anemic bounce off warmer US temperatures which have air conditioning demand for natural gas generated electricity running strong, but Asian spot gas prices finished last week soft on reports of soft demand. A bullish supply development overnight came from a Bloomberg article predicting Russian gas exports will decline by 25% this year after Russian gas exports fell 32% in 2022. Fortunately for the bull camp, the EIA reported US natural gas exports to Mexico posted record readings in June which could help siphon off burgeoning US supply. Another underpin for prices is two straight weeks of smaller than expected US injections to EIA working storage.
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