CRUDE OIL
While Saudi Arabia and Russia have suggested the large Saudi July production cut promise of 1 million barrels per day is justified to “stabilize” the world energy markets, we are skeptical. The Saudi oil minister also indicated the surprise move was an effort to create uncertainty for aggressive speculation in the markets. The Saudi production cut for the month of July is expected to be roughly 1 million barrels per day compared to the most recent figures from May. Furthermore, OPEC+ members yesterday decided to reduce overall production targets next January by an additional 1.4 million barrels per day. The OPEC Plus meeting resulted in the group extended their production cuts through the end of 2024. OPEC+ members represent roughly 40% of global oil production. Saudi Arabia made a voluntary reduction to their output starting in July, which should provide the markets with lift through the coming week. Russia Oil Minister Novak said that his nation is fulfilling their output cut obligations in full, although there has been some speculation that the OPEC Plus Russia output target (along with those for Nigeria and Angola) are more cosmetic in nature and are just bringing them in-line with their current output levels.
NATURAL GAS
Natural gas prices were able to finish last week by breaking a 5-session losing streak with a mild gain on Friday, but they will start this week within striking distance of a new low for the move. We suspect natural gas will derive some spillover support from the sharp gains in petroleum prices from the OPEC+ production reduction in July. However, last week gas flows to US LNG export terminals declined by 14% and European gas storage has reached 70% of capacity relative to the 5-year average for this time of the year of only 52%. Therefore, it is not surprising that Goldman Sachs reduced its gas futures price target by $0.15 into the end of the year. On the other hand, natural gas exports to Mexico reached 7.6 bcf last week which would be a record high and should support natural gas prices. Hot weather will continue in the Midwest while there will be above-average temperatures in the Pacific Northwest late this week, but showers in Florida, Texas and other areas of the US will limit cooling-related natural gas demand. As a result, US weather remains a slight positive for natural gas as the market needs above normal demand to reduce current storage levels which have been running 16% above their 5-year average. Tropical Storm Arlene has lost strength and will not threaten Gulf Coast infrastructure which will pressure natural gas prices early this week. The threat of a downside breakout in natural gas remains in place as US natural gas production remains close to record highs, near-term weather forecasts remain are only slightly bullish, and the net spec short position is not yet at an extreme level.
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