Tight US Supply Support Waning

CRUDE OIL

The crude oil market rally this week was clearly built off a surprise 4^th straight week of tightening US oil inventories with US supplies declining by 24 million barrels versus normal seasonal patterns. Furthermore, energy market sentiment toward demand remains negative with Chinese traffic congestion levels posting 4^th straight week of declines. Fortunately for the bull camp China this week reduced bank lending rates and reduced the national retail fuel price structure to help support the struggling economy. It should also be noted that the Chinese have ramped up their refinery throughput which is probably an attempt to facilitate cheaper prices through market mechanisms in is unlikely to be the result of signs of strong demand on the ground. From the supply front, this week’s US inventory reports threatened the bear camp and are keeping bearish sentiment in check into next week’s OPEC+ meeting. Most analysts think OPEC is in a wait and see posture as soft Asian demand continues to erode views from earlier in the year that global 4^th quarter demand would be strong. However, as indicated already Chinese throughput rates are jumping which should increase the call on global supplies but that is likely to be offset by declining US refinery operating rates which have fallen roughly 4% over the last 4 weeks. In addition to the outlook for strong demand, OPEC plus delegates will be considering Russian overproduction which has been partially discounted by promises from Russia to catch up compliance in the coming quarters. However, the pace of reduced supply to remove oversupply is not material enough to support prices. On the other hand, the bull camp will note Russian exports are beginning to see a larger than normal seasonal decline and it has been reported that Russian ships in the Red Sea have seen more attacks by Yemeni rebels than any other nation!

PRODUCT MARKETS

While the product inventories fell in the most recent weekly readings, key inventories continue to hold surpluses versus year ago levels and are approaching peak seasonal demand in the coming weeks. However, demand since the July 4th holiday has remained strong in the US with the four-week moving average of demand running 120,000 barrels per day above average. As indicated in crude oil market coverage today, the Chinese officially lowered retail fuel prices in an effort to stimulate demand but demand support from that news is overshadowed by a 4^th straight week of declining Chinese traffic congestion. In Europe seasonal demand should continue to build for gasoline and jet fuel, the Paris Olympics could stimulate fuel demand especially with a terrorist attack shutting down the French high speed train system overnight. European ARA inventories this week saw gasoline inventories increase by 31,000 metric tons, jet fuel increase by 6000 metric tons and gas oil inventories decline by 73,000 metric tons. It should also be noted that commercial traders are beginning to posture for the peak in global summer jet fuel demand. In another bearish influence, the Midwest weather induced refinery outage (west of Chicago) has had its impact (plus $0.17 regional pump price gains) with Exxon expected to restart most output next week.

NATURAL GAS

Above normal temperatures across the Lower 48 are posting cooling demand, but US inventories as a percentage of five-year average levels remain in double-digit surplus territory and therefore a minor reduction in output from the Freeport export facility is almost totally discounted. Apparently, the reduction in flow from the Freeport facility was 67% on Wednesday with the facility likely to fully recover soon. Even a production glitch in Australia and a 45% week over week jump in Tokyo cooling demand consumption has failed to inspire buying. After expectations of a weekly EIA natural gas inventory injection 11 – 24 BCF, the trade was presented with an injection of 22 BCF which left the year-over-year surplus at 8.4% (unchanged on the week) and lowered the surplus versus the 5 year average from 16.9% last week to 16.4% this week. At present, EIA natural gas inventories are 249 BCF above year ago levels! The 6-10 day forecast calling for above normal temperatures across most of the US, and the 8-14-day predicting above normal for almost the entire country will simply discourage selling.

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