Written Commentary
CRUDE OIL
While we expect significant volatility from the prior 4 trading sessions to moderate slightly, fears of softening energy demand remain a problem for the bull camp. Furthermore, the trade is anticipating another sweep of negative weekly data from the API and EIA. Clearly, the surprise and aggressive Saudi production cut of 1 million barrels per day is not capable of lifting prices as was hoped for by the Kingdom. It should be noted that the most recent net spec and fund long positioning in crude oil remains near the lowest levels since September 2010! Granted, US production continues to fill the void left by the reduction in output from OPEC+, but sanctions against Russian oil have not limited exports from Russia and in many ways have robbed non-Russian sellers of market share. Following their surprise decision to unilaterally reduce daily production by 1 million barrels per day in July this weekend, it was not surprising to see Saudi Arabia raise the price of their July Arab light crude oil up to 6-month highs yesterday. Obviously, the Saudis are disappointed in the magnitude of the price reaction to their surprise cut. However, UBS suggests the Saudi production cut will provide support for prices. It should also be noted that Saudi oil exports tend to decline in the summer as extreme heat in the country explodes domestic demand for cooling.
NATURAL GAS
While we suspect ongoing hot temperatures in the Midwestern US provided lift to natural gas prices yesterday, European gas prices jumped 18% prior to the US opening off talk that the oversupplied European market was beginning to tighten but the bull camp needs a constant flow of improved demand stories to avoid a return to contract lows. Apparently, Dutch pricing posted the most significant jump which in turn was the largest upward price reaction in over 2 months. It goes without saying that the surprise Saudi cut provides a slight threat against aggressive gas shorts which should also be concerned about hot US temperatures entrenching in the middle of the US. However, overnight the market was presented with a negative from a week over week jump in floating LNG supply and this week’s Reuters poll projects EIA working gas in storage to see an injection between 100 and 119 BCF. Furthermore, despite several fundamental arguments providing support to gas prices, recent news has failed to lift prices significantly off the lows. In the end, we give credence to the recent consolidation lows starting at $2.1380 but without a US forecast predicting entrenched much above normal temperatures throughout a large portion of the US, rallies could be limited to short covering.
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