Written Commentary
CRUDE OIL
In retrospect, the crude oil market has weathered the hawkish testimony from the US Federal Reserve chairman, an ongoing wave of foreign central bank rate hikes and unending suspicion toward Chinese demand with prices early today almost forging a 7th straight higher high. However, API crude oil inventories declined by 1.2 million barrels, the Chinese continue to cause freight rates to rise because of their crude oil import quotas and since the beginning of June, middle east to China tanker rates have increased by 178%. Another bullish influence operating in the trade is expectations that US crude oil exports in July will jump sharply given early fixtures and therefore US domestic crude oil stocks are expected to experience a sharp drawdown. With a negative shift in global risk sentiment late on Tuesday, the energy markets may need to see bullish results from today’s EIA supply report to hold their ground near this week’s highs. In addition to negative Russian supply flows, there are other signs that global supply might be building with Iraq, Iran, and Venezuela showing the potential to expand exports. With the United States Oil Fund ETF yesterday seeing the largest daily outflow this year it appears investors have turned away from long energy positions. As for the EPA biofuel blending mandates, corn-based ethanol saw lower mandates than expected with overall mandates for blended biofuels projected higher over the coming 3 years. After the close, the API survey said that US crude oil stocks had a weekly decline of 1.2 million barrels which was a much larger weekly decline than trade forecasts.
NATURAL GAS
While the natural gas market continues to have a bearish supply outlook, it is receiving badly needed support from a bullish US weather outlook. There were forecasts for Texas electrical use to break a single-day record due to severe heat, and that helped natural gas prices to regain upside momentum as roughly half of Texas power plants use natural gas for electrical generation. The latest 6-to-10-day forecast shows Texas and Oklahoma will continue to have above normal temperatures, but a large portion of the continental US is seeing near-normal to below-normal temperatures. In a development likely to impact prices next week, tropical storm Bret has strengthened and another tropical depression has emerged. While US dry gas production continues to hold above 100 bcf per day, it has fallen back from the record highs seen last month due to pipeline maintenance in the Haynesville basin. We think the bull camp needs a low net injection in the EIA storage report again this week for natural gas to extend its recovery move and retest Tuesday’s 4 1/2 week high.
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