CRUDE OIL
With September crude oil seemingly settling into sideways chop, the strong early July rally appears to have factored in the improvement in macroeconomic sentiment and improved energy demand expectations. Therefore, US claims presents the potential for a price junction and the potential for signs of which fundamental forces are currently driving prices. Bullish overnight developments include the potential for the US Senate to vote on blocking sales of US strategic oil reserves to China, this week’s largest decline in Cushing crude oil inventories since 2021, residual under the surface equity market optimism and further signs Russia is paring back August exports. However, crude oil market traded mostly higher yesterday, but failed to take out last week’s high perhaps because the EIA report was bearish. In fact, with a smaller than anticipated decline in gasoline stocks, a smallish decline in crude oil stocks, and a somewhat disappointing weekly implied gasoline demand reading, the weekly report was clearly a blow to the bull camp. Furthermore, the bearish weekly EIA report yesterday was the 2nd bearish report in a row. The bull camp should also be discouraged by the lack of an extension of energy demand optimism given the extension of risk off sentiment flowing from financial markets this week. On the positive side of the EIA report, EIA gasoline stocks not only saw an expansion of the annual deficit, but the size of the annual deficit almost doubled from the prior week. We mentioned the tight situation in gasoline as a supportive issue for crude oil because of gasoline’s leadership role recently but more importantly because fears of further tightness in the East Coast gasoline market as that could become a flashpoint favoring the bulls throughout the petroleum complex.
NATURAL GAS
The natural gas market continues to be caught in a range with flush supplies offsetting signs of surging demand from regions with extreme heat and strong cooling needs. In fact, the market has failed to benefit overnight from evidence that Russian gas exports to China reached an all-time high in May as that should increase competition for Europe in refilling their strategic winter inventories. On the other hand, the trade might be interpreting the significant Russian supply flow to China negatively from the perspective that supply thought to be locked inside Russia from sanctions continues to flow outward without obstruction. While we do not see a strong probability of significant and surprising supply related news from Russia, the recent decision by Russia to halt an agreement allowing grain ships to move through a Black Sea shipping corridor, combined with the subjects of cluster bombs and the mutiny by Russian mercenaries could result in Russian gas shipments to Europe being reduced. However, without a surprise and significant supply threat a sustained rally in natural gas is unlikely.
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