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Crude Market Overbought

CRUDE OIL

Like many markets, the crude oil market enters the last trading session of the week overbought from a technical perspective and to a similar degree from a fundamental perspective. Other signals of an overbought status is the proximity of the 200-day moving average in WTI and signs of a shift in view from spread relationships. Yet another limiting force for the bull camp today is the approach of the price Cap which could quell interest in Russian supply. Clearly, the significant first half jump in Chinese crude oil imports (relative to last year), surging animal spirits improving views toward commodities, and a precipitous decline in the US dollar (which in turn makes US oil much more attractive to foreign buyers) offers significant bullish fundamentals. In fact, Chinese June crude oil imports jumped 45% over last year and with crude oil prices reaching the sanctions cap and the dollar falling precipitously, China may begin to step up its imports of US oil. Further evidence of residually strong Chinese demand came from the most active Chinese state refinery run rates since 2021. It should also be noted that Chinese traffic patterns have continued to stabilize with an upward bias with congestion readings compiled by Bloomberg at the highest level since the congestion measures were developed in 2020. Furthermore, global crude oil prices are primarily priced in US dollars and the sharp decline in the dollar lowers prices US grades of crude oil to a wider range of potential buyers. Countervailing the improved demand view is a reduction in this year’s demand forecast by the IEA even though the EIA earlier this week projected $80 oil and Macquarie predicting Brent crude oil reaching $85/$90 this quarter. The bias is up but the market has baked in significant demand improvement and will likely need ongoing improving animal spirits to extend the September crude oil rally above $77.50.

Oil Rig & Tanker

NATURAL GAS

The head of the gas market has turned down with the sideways consolidation disrupted and the trade displaying a lack of interest in hot pockets in different geographic regions around the world. In fact, the market has also discounted predictions that US gas consumption for electricity generation will reach a record high this month. Furthermore, this week’s injection report showed a nominal injection despite record Texas cooling demand. The weekly natural gas storage report showed an injection of 49 bcf. Total storage stands at 2,930 bcf, or 14.2% above the 5-year average. Over the last four weeks, natural gas storage has increased 296 bcf. In short, we see August natural gas prices retesting $2.50 and likely falling below that level unless extreme hot forecast out to July 15th in Europe extends and US temperatures restricted to the south extend northward.

 

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