Written Commentary
CRUDE OIL
The direction of crude oil prices today is obvious with the lockdown of a major Chinese economic hub overnight and the market presented with the highest US oil production reading since April 2020 yesterday. With the focus of the crude oil trade largely fixated on the prospect of softening demand, a return to the August low just above $85.00 is logical targeting. Furthermore, with dollar strength expected, weakening WTI and Brent time spreads and notable weakness in Bakken crude oil pegging prices at the lowest level in 3-months, the bear camp has a long list of themes. The weekly EIA report yesterday was bullish to crude oil and bearish to the products. In fact, crude oil stocks forged a third straight weekly decline with a cumulative 3-week decline of 14 million barrels. However, the year-over-year EIA crude oil stocks deficit contracted, US crude oil production increase by 1.7% (11.8 million barrels per day to the highest level since April 2020) and the refinery operating rate declined with further seasonal maintenance capacity reduction expected in the weeks ahead.
As in the crude oil market, the gasoline market continues to factor in seasonal and cyclical reductions in demand. In fact, average total product demand for the past four weeks was down 6.43% compared to last year while average total gasoline demand for the past four weeks was down 6.37% compared to last year. Earlier in the week, an 8.6% decline in July Chinese refined fuel demand should be the bear’s biggest force. Adding into the negative fuel demand storyline is the lockdown of a major Chinese city overnight due to Covid infections. EIA gasoline stocks fell 1.172 million barrels and are 12.739 million barrels below last year and 16.128 million below the five-year average. Gasoline imports came in at 584,000 barrels per day compared to 615,000 barrels the previous week. Despite the supportive EIA gasoline readings yesterday, fresh supply news this morning is bearish with Singapore weekly fuel supplies rising 2.3% over the prior week. With nearby gasoline futures returning to the vicinity of prices before the Russian invasion, the market could soon be undervalued fundamentally as well as technically oversold.
NATURAL GAS
On one hand, the lower low for the move in gas yesterday undermines the bull case. On the other hand, the actual Russian shutdown of the Nord Stream 1 Pipeline (reportedly for 3 days of maintenance) could ignite a return to contract highs especially if the shutdown lasts for longer than the stipulated 3 days. Recent changes in the maintenance contract of the pipeline by Russia seem to indicate a desire to have clear control of flows through the pipeline. Warm temperatures in the western US provide some support, but the seasonal downtrend in temperatures has begun and US weather should become less important. Furthermore, it should be noted that the current hurricane season is shaping up to be the least active in modern history.
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