Written Commentary
CRUDE OIL
While a positive tone continues to flow from equities, the dollar continues to fall and front month crude contract spreads are supportive demand destruction fears remain a constant threat. In fact, Chinese state-run refiners and small teapot refiners are lowering run rates and Chinese June crude oil imports declined by 10.6% on a year-over-year basis. On the other hand, key oil market information sources like IEA and EIA expect ongoing reductions in the use of Russian oil ahead as nations/companies work out from under contracts. Portions of the trade also expect Russian oil output to fall by as much as 2 million barrels per day in the 2nd half of this year! Furthermore, the trade remains confident in the inability of OPEC+ to expand production with compliance to output cuts remaining above 200%. While OPEC+ might not be able to expand output, the trade is expecting OPEC to offer more oil in their next meeting.
An overnight report suggesting the 2022 US summer driving season is coming in much weaker than expected combined with the Department of Energy comparing the fast pace of the decline in implied demand from the season high this year to the massive decline in demand posted back in 2008! In fact, some analysts suggest that the precipitous decline rate in the implied gasoline demand readings resembles that of the first quarter 2020 during the pandemic outbreak. As indicated in crude oil coverage today, the US refinery operating rate has remained very high near 95% for 3 weeks and that combined with a softening of seasonal demand could result in another large weekly inflow to gasoline inventories at the EIA.
NATURAL GAS
With Russia claiming force majeure and that notice rumored to be gas supply flow from the Nord Stream 1 pipeline, fear in Europe that gas flows will not be returned (July 21st) after the maintenance has escalated buyers are likely to remain active. Even the European commission does not expect the Russians to resume supply flow through a very key pipeline to the West! The latest Russian comments indicate the gas flow halt is beyond their control. Apparently, the Russian national gas company declared force majeure in letters to Germany’s largest importer of Russian gas as they did to Germany’s largest electric power generator (RWE). While the trade has factored in the prospect of Nord Stream 1 not coming back online as designated on July 21st, the threat of that situation should continue to lift prices.
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