Written Commentary
CRUDE OIL
The crude oil market this morning is faced with an avalanche of bullish and bearish developments, but the bear camp has exhibited only minimal control. On the bullish side of the equation crude oil storage in ARA facilities declined by 3.7% relative to last week, North Asian refineries are likely to take and receive their full allocation of Saudi oil next month (sign of good demand) and the shutdown of a portion of a Russian oil pipeline (the southern leg of the Druzhba pipeline) counters a portion of negative supply news flowing from the US and Iraq. Yesterday afternoon API crude oil stocks increased by 2.1 million barrels and Iraq posted a 69,000 barrel per day increase in production in July compared to June. Furthermore, there are fresh demand concerns from the outbreak and lockdown of a key Chinese tourist destination, a lockdown of a major Chinese metal processing city, signs of softer Euro zone refinery intake and from signs of reduced price offers from West Africa from European and Chinese buyers. On the other hand, in a bullish development, US oil tankers have begun supplying oil to Germany which in effect reduces the amount of oil flowing around the Russian blockade.
While the gasoline market likely derived lift from strength in crude oil from a disruption of Russian oil flows yesterday, the gasoline market also saw demand expectations improve after news that US average retail gasoline prices declined by nearly 3% versus last week. However, in a potential major negative, Bloomberg yesterday reported that a gasoline shipment destined for New York was diverted to West Africa because of reports of weak US demand! In defense of the bear camp, the EIA released negative gasoline demand statistics and indicated 4-week average gasoline demand fell last week below the last 2 years lows for this time of the year.
NATURAL GAS
While the natural gas market remained within the Monday trading range throughout the Tuesday US trading session, we see the potential for a major volatility/fresh trend junction directly ahead. Certainly, European sovereign buyers will step in and buy breaks in prices as they attempt to fill strategic supply ahead of winter. However, the EU has declared an emergency plan has been invoked and that will require member countries to reduce gas consumption by 15% into this winter. Furthermore, German gas rationing plans are also being put into place and that could also reduce German gas demand. It should also be noted that we are entering the shoulder season in the northern hemisphere where cooling demand moderates and heating demand is not a large factor.
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