Written Commentary
CRUDE OIL
We cannot help but think the crude oil rally is running on fumes off the benefits of OPEC+ production restraint. However, the overall outlook for global energy demand has improved because of signs the US economy continues to grow and may pull the rest of the world away from recession. Furthermore, despite the markets lack of near-term confidence in the Chinese government’s capacity to quickly jumpstart the Chinese economy, the Chinese Premier overnight promised to spare no time in sparking the economy. From a bigger picture perspective, the recent rally has not resulted in crude oil prices reaching what we ultimately think will be expensive levels. Other positives include 3 straight weeks of declining US crude oil inventories, strong US implied gasoline demand, the first decline in EIA distillate stocks since May, the lowest crude oil stocks since January, an expansion of jet fuel demand and perhaps most telling, signs of “tightening” in the global diesel market. Crude oil imports for the week stood at 7.038 million barrels per day compared to 6.580 million barrels the previous week. The refinery operating rate was 91.1% down, 1.1% from last week compared to 94.5% last year and the five-year average of 90.8%. In today’s action we give the edge to the bear camp as rising US rate fear keep equities and commodities off balance.
NATURAL GAS
While we are not surprised natural gas prices posted a downside breakout yesterday, we are surprised the market was able to limit the downside action. Apparently, the natural gas trade sees average US cooling inspired demand for natural gas more than offsetting of a blistering heat wave in Germany and Spain that is expected to remain in place over the next 10 days. Furthermore, this morning the market is facing pressure from discouraging Chinese LNG import levels and because of the potential for the largest weekly European gas price decline since May (again despite ultra-hot temperatures in the euro zone). Furthermore, reports from Bloomberg yesterday indicate that strategic storage in Europe has roughly reached 80% of capacity which indicates European buyers will be unlikely to buy strength and instead will become even more selective in their purchases. The path of least resistance is down with natural gas traders confident in a continuation of a flush supply condition and no expectation of a surge in US demand.
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