Strong Demand & Tightening Supply
Overnight headlines reiterate strong Chinese and Indian demand along with further evidence of tightening supply from reduced production from Saudi Arabia and Russia. In fact, India continues to aggressively purchase Russian oil despite the discount of Russian oil to global markets narrowing to $8.00. Furthermore, the Saudi national oil company has confirmed strong Chinese refinery buying interest for September and Bloomberg earlier this week showed Chinese traffic congestion levels increasing. Positive macroeconomic influences include escalating expectations of a pause by the US Fed next month, signs of softening inflation in Europe and the US and a strong US implied gasoline demand reading this week. While the petroleum markets showed strong positive early action yesterday, prices ultimately faded from those highs in the wake of soft US scheduled data. It is also possible that petroleum prices fell back yesterday from simple short-term overbought position balancing, and perhaps because of creeping doubt regarding strong OPEC energy demand forecasts for the rest of this year. In fact, some traders might have been disappointed by OPEC demand forecasts which were mostly centered on next year and were once again largely based on the belief of strengthening Chinese energy demand. On the other hand, the OPEC supply outlook supports predictions of a decline in OPEC oil production in July of 836,000 barrels per day. Another anecdotal sign of tight supply came from Saudi Arabia’s confirmation to the cartel that they achieved their voluntarily production cut promise. Yet another bullish supply-side development was seen earlier in the week from sharp declines in global tanker rates, supposedly because of less bookings by Russia and Saudi Arabia which in turn was thought to be the result of idled vessels. Obviously, the petroleum markets are short-term technically overdone and in need of fresh bullish supply and/or fresh bullish demand information to extend the rally straightaway.
If the petroleum markets are overbought technically and fundamentally, the natural gas market is severely overbought from both technical and fundamental perspectives. In fact, we have had issues with the bull tilt this week justified by East Coast heat, and by the threat of disrupted supply because of an Australian LNG workers strikes. Certainly, we are not discounting the potential for a sharp upside price extension in natural gas if there looks to be a prolonged Australian LNG plant workers strike which would force customers like China to seek alternative sources.
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