Written Commentary
CRUDE OIL
With bearish global energy demand news flowing early in July (mostly from China) the September crude oil contract justifiably remains near last week’s downside extension pricing. Fortunately for the bull camp, Chinese government owned refinery run rates reached the highest levels in nearly 8 weeks which could help offset sagging demand. It should also be noted that Chinese economic data showed a slight improvement at the end of last week but not enough to extinguish growth concerns and soft energy demand fears. Tempering the bear case is last week’s sharp 20 million barrel weekly decline in EIA crude oil inventories which is showing a developing trend of weekly large inventory declines. In fact, over the last four weeks EIA crude oil inventories have declined by 54 million barrels! Another supportive supply side development came from the weekly crude oil in floating storage report which showed 27% lower supply than year ago levels. However, the week over week amount of global floating storage increased with Asian Pacific storage 17%. Unfortunately for the bull camp, seasonal refinery activity counter seasonal weakness and typically peaks in the next two weeks. While not direct supply threats, a significant heating up of Israeli/Palestinian fighting (a missile attack on the Golan heights and a Russian oil depot fire (from a drone attack) have likely provided some speculative buying.
PRODUCT MARKETS
Like the crude oil market, the EIA gasoline inventory report has been largely supportive over the last two months with weekly declines posted in three of the last four weeks and the year-over-year surplus reduced by nearly 4 million barrels. Furthermore, the US refinery operating rate has fallen and could be poised to make an earlier than normal seasonal top which could lead to further tightening as the end of the summer driving season approaches its secondary seasonal peak behind the kickoff of summer. While US implied gasoline demand has been running below year ago and average levels, last week implied demand was very strong at 9.45 million barrels per day with that reading effectively the third implied demand reading near 9.4 million barrels in three of the last four weeks. Sentiment in the gasoline market is clear as the hedge funds have the lowest speculative positioning since the pandemic lows. While the net spec and fund long traders (noncommercial and nonreportable) have seen a significant liquidation in their long positioning the market has yet to reduce the net long below a nine month low.
NATURAL GAS
With a new low for the move in September natural gas, hotter than normal US temperatures have not discouraged sellers. Not surprisingly, hot weather in northern Asia has failed to support futures prices despite a pickup in physical trading demand in the region. Adding into the bear case is news that the Freeport LNG facility has full capacity after moving nearly 2 bcf of natural gas yesterday. In a minimally supportive development, the Harris campaign has not openly supported a US fracking ban but given the Trump a lead in the polls the fear of significant future supply should keep traders with a bearish bias. Speaking on longer-term trends, the weekly EIA natural gas inventory report has consistently narrowed year over year and current year versus five-year average inventory surpluses, but surpluses remain an 800 pound weight hanging on the market.
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