Written Commentary
CRUDE OIL
While the short-term technical bias favors the bull camp, last Friday’s significant range up move combined with a risk off vibe toward the economy today, forecasts of record US 2023 production and a 5.5% week over week rise in global crude oil in floating storage provides the bear camp with the edge. Through April, US crude oil production was up 9% year-over-year setting the US up for record annual production surpassing the old record of 12.32 million barrels per day. However, the 430,000 barrel per day potential increase in US production is heavily offset by a more significant reduction by OPEC+. We are skeptical recent strength in crude oil was largely the result of the latest step up in output reductions by Saudi Arabia and Russia. However, last week presented positive internal and external energy demand signals which combined with the perception of tighter supply should now help support prices against correction. Perhaps the trade is embracing chatter for the potential for unilateral production cuts by OPEC+ members. However, it should be noted without Saudi Arabia reduced output, other producers besides Russia will not be able to cut production significantly. On the other hand, the perception of tighter supply is not completely the result of the latest production cut agreement as US crude oil stocks tightened while demand for products showed improvement. In a minimal longer-term negative, the US oil and gas rig operating count declined for the first time in 10 weeks. However, the current rigs operating are 10% below year ago levels with oil rigs declining 5 in the most recent Baker Hughes report. As indicated in many other market coverages, the Russian/Ukraine situation is in a significant state of flux with signs of negotiations or signs of Putin’s demise potentially whipping up volatility.
NATURAL GAS
The path of least resistance is down in natural gas with the market unable to benefit from significant/severe heat in Spain and Germany in the week ahead. In retrospect, the natural gas market failed to benefit from a somewhat small weekly injection last week of 72 BCF. Total storage stands at 2,877 bcf or 14.6% above the 5-year average. Over the last four weeks natural gas storage has increased 327 bcf. However, the surplus to the 5-year average storage level for this week of the year was unchanged on the week at 14.6%. While the market might not find support from the excess heat in Europe, US temperatures in the coming days will see 90-degree temperatures running across the entire lower half of the US.
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