CRUDE OIL
Like global equities and currency markets, the petroleum markets have reversed course in what is likely a technical balancing of very significant late June and early July rally. In fact, the September crude oil contract last Friday stalled at the highest price since April 25th and then finished almost $2 below its early high, therefore, the crude oil market has the appearance of an intermediate top. In retrospect, the petroleum markets have priced in an upbeat energy demand outlook which may overstate current consumption patterns especially given soft Chinese economic data released overnight. The bear tilt is further evidenced by the markets lack of positive reaction this morning to news that crude oil in floating storage declined by 21% over the last week, Saudi Arabian crude exports in May declined by 388,000 barrels per day and following news that Chinese daily oil throughput last month increased. In a longer-term bullish development, the US Baker Hughes rig drilling count showed crude oil activity down 3 with a total operating level of 537 rigs. From a technical perspective, the net spec and fund long positioning in crude oil remains very low with the recent net long at the lowest levels since February 2016. Furthermore, the precipitous slide in the US dollar should kick up the attractiveness of US supply, especially with global prices reaching the Cap set forth in the sanctions against Russia. Traders are already expecting shipping delays of Russian oil as sellers, shippers, and buyers hesitate from fear of reprisals for paying up for Russian supplies. In conclusion, the trade has factored in a significant improvement in demand from the end of June and last week’s EIA report shifted definitively bearish in almost every reading.
NATURAL GAS
While it took a week’s worth of slow grinding losses on the charts, the trade has embraced the idea that significant natural gas supply tightening in the northern hemisphere cooling season is unlikely to unfold. In fact, natural gas continues to see a steady pattern of injections despite extreme heat in the southern US, the west and in portions of Europe. Certainly, the EIA working gas in storage surplus relative to 5-year average storage levels has continued to shrink but with a surplus of 14.2% versus 5-year average storage levels the US supply condition remains bearish. Last week, US output increased with LNG feedstock supply flow to export facilities declining and thereby increasing the prospects of a large storage injection this week. At least early today another extreme heat blast flowing from North Africa into southern Europe has been discounted despite forecasts of record temperatures in areas of Europe and the US West. The net spec and fund short in natural gas has been reduced and given the gradual and uniform slide from the late June high, the net spec and fund short has probably started to expand but is not near oversold levels. We leave the edge with the bear camp with supply influences negative and US cooling demand settling in at average levels.
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