Written Commentary
CRUDE OIL
As usual energy prices quickly and aggressively rushed to factor in demand destruction likely from an upcoming recession. Even though the US Federal Reserve Chairman yesterday suggested a US recession is not inevitable, the job of the futures market is to factor in future expectations and yesterday’s spike low in crude oil prices should have factored a moderate portion of significant demand slowing. However, the potential amount of energy demand destruction could still surprise the trade and the status of the Chinese economy remains a wildcard. At present, we see the embargo situation as a bearish influence as India and China continue to purchase heavily discounted Russian oil openly and very aggressively.
While product prices are showing recovery action this morning along with crude oil prices, we suspect the downtrend will resume soon. In fact, API product data released yesterday afternoon was definitively negative and was accentuated by news this morning that Singapore weekly fuel stockpiles increased by 2.7% on a week over week basis. It should also be noted that Asian refinery margins (gasoline and jet fuel) continued to post records and that should facilitate more production ahead. In another negative, there are reports that many tankers are shifting from hauling crude oil to fuel supply and that could begin to temper record refinery margins. As indicated already, US gasoline demand should continue to rise through the upcoming July 4th holiday.
NATURAL GAS
Certainly, the natural gas market has different supply and demand fundamentals than the petroleum complex, as the potential for Russia to completely shut off gas flow to Europe appears to be looming. Unfortunately for the bull camp, US export capacity has been injured by a loss of LNG export capacity due to a fire. Therefore, US supply to Europe is reduced and supply in US is likely to “back up”. In fact, news that Russian gas revenues are equal to year ago levels indicate Russia has the capacity to “do as it wishes” with respect to upcoming exports.
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