Written Commentary
CRUDE OIL
With the energy markets at the end of last week anticipating a “true end” to the war and hopeful of the restart of tanker movement through the Strait of Hormuz, we are not surprised to see a $5.50 rally off last week’s low this morning following aggressive military threats from the US. However, reports that several Qatari LNG tankers have entered the Strait of Hormuz (against a reported resumption of an Iranian blockade) suggests some Middle East players expect current negotiations to result in a reopening of the Strait of Hormuz. However, the US president has issued very threatening military aggression if Iran fails to proceed directly to compliance with a peace deal. In fact, the US once again indicated they would seize the Strait by force if necessary. While the focus remains on the Middle East, it should be noted that US EIA oil inventories have posted a precipitous decline since the middle of April with inventories declining from 468 million barrels to 417 million barrels in a clear sign that the US continues to see significant demand from the supply disruption in the Middle East.
PRODUCTS
While the product markets will see support from seasonal demand, the markets are currently pricing the peak in seasonal demand and with the highest US refinery operating rate at the top of the refinery operating rate range since early 2019, we expect supply to begin to rebuild aggressively in the coming weeks (especially the passing of pre-buying ahead of the July 4th holiday).
NATURAL GAS
Surprisingly, August natural gas has jumped sharply to 10 day highs with prices seemingly poised to retest three-month highs up at $3.418. The sharp upside move is very surprising in the face of reports that Qatar has several LNG tankers moving into position to transit the Strait of Hormuz. In other words, is it possible that Qatari officials have inside information suggesting a peace deal is still likely/possible. However, it is more likely that natural gas price gains this morning are the result of fears that the Strait of Hormuz will remain shut following harsh dialogue between the players over the weekend. In fact, the US rally was led by European gas prices which gained 3.9% this morning reportedly off very aggressive military threats from the US president if Hezbollah continues to attack Israel. It should also be noted that European gas storage at the end of last week was only 46% full, which is significantly below the five-year seasonal average of 61% for this time of the year which could add to the bull case if off season supply refilling falls further behind.
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