Sharp Declines in API Stocks
The crude oil market continues to rally with fresh higher highs for the move posted early today. Apparently, escalating big picture macroeconomic fears from disappointing data, looming US default, a significant jump in US interest rates and ongoing strength in the dollar are being aggressively discounted by the trade. Even more surprising is the market’s ability to discount fresh concerns of a 2nd Covid wave in China. However, with the Saudis threatening short sellers into the OPEC+ meeting and massive declines in API energy inventories yesterday the bull track is likely to extend. In fact, the 6.79-million-barrel decline in API crude oil stocks combined with a similar massive decline in API gasoline inventories rekindles supply tightness concerns and in turn is sparking speculative and hedge buying. However, the market has been presented with bearish developments with a moderation of threatening conditions from wildfires in Canada and indications from France that it has already restocked 70% of oil reserve stocks dispensed during its prolonged refinery strike. From a historical perspective, seasonal refinery operating rates should rise consistently over the coming 2 months before peaking at the end of July. We see the refinery operating rate rising consistently until fewer than 5% of US refinery capacity is idled.
With near term weather forecast predicting slightly cooler than normal temperatures throughout the southern US (a very key cooling demand region), a rise in US gas production yesterday of 2.7% and a 2.2% year-over-year declinein lower 48 gas demand yesterday the bias in natural gas prices is down. From a technical perspective, the recent rally in natural gas has likely moderated a long-held net spec and fund short position somewhat which could result in a wave of extremely aggressive fresh selling if there is a macro economic meltdown ahead. This week’s Reuters poll pegs EIA natural gas in storage to expand by 94 BCF to 102 BCF. If there is a triple digit injection this week that will be the first triple digit injection this year and that will likely rekindle oversupply fear.
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