Written Commentary
CRUDE OIL
While G7 discussions focused on “capping” the price of Russian oil offers up supply side support, demand destruction fear is escalating in the background. In our opinion, the embargo of Russian oil supply has been a major failure with major buyers unwilling to punish Russia. In fact, the EIA last week suggested the world oil market in May posted a surplus, which suggests that supply is rising, and demand is softening. Arguing against the rebuilding of supply argument is news that global crude oil in floating storage declined by 15% in the last week, with the largest decline seen in the Asian Pacific markets. Along those lines reports are that Chinese crude oil stockpiles continue to drawdown at the same time refinery activity creeps higher. There is a slight supply-side threat from Libya where production and shipping has been interrupted regionally leading the national oil company discussing force majeure.
While the gasoline contract finished strong last week with a low to high recovery bounce of $0.23 and has forged a higher high this morning, the fear of demand softening from slowing in the economy remains a limiting force for the bull camp going forward. Certainly, strong summer demand will remain in place, but the trade is also cognizant of the fact that the “seasonal peak” is approaching. On the other hand, demand for shipments of clean fuel from Asia to the Americas reached the highest level since March in a development that could hit US fuel prices after the upcoming US holiday. We suspect recent meetings between the US government and key US energy players will yield some effort to expand gasoline supply, but it should be noted that the US refinery operating rate has already remained above last year every week this year and the refinery operating rate has also remained above the five-year average since early February.
NATURAL GAS
Obviously, the precipitous washout in natural gas prices since the early June high leaves the technical bias in the market pointing downward. However, the August natural gas contract has now returned to a potential psychological support level of $6.00. Fortunately for the bull camp, European confidence from aggressive storage rebuilding efforts has prompted fresh efforts to curb overall gas demand and that suggests an upcoming attempt to wean off Russian supply. In yet another bearish storyline the Russian national gas company has confirmed it continues to ship gas to Europe through the Ukraine. According to the Russian gas giant Sunday’s volume through the Ukraine pipeline was pegged at 42.1 million cubic meters. On the other hand, late last week fears in Germany and other European areas (heavily dependent on Russian gas) were suggesting Russia was close to halting their gas imports.
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