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Potential Declines in US Crude

CRUDE OIL

Fortunately for the bull camp, the trade is presented with an extension of this week’s general risk on pattern in equity markets and the prospect of notable declines in US crude oil inventories. With an “as expected” decline in EIA crude oil inventory reading today that will result in seven declines in the last 8-weeks. It should ALSO be noted that a decline in EIA gasoline inventories today will be the 6th decline out of the last 7 weekly readings. However, chart action early on favors the bear camp markets especially with the trade presented with an Iranian production rise of 100,000 barrels per day by the end of next month. While the magnitude of the recovery in Iranian supply is not numerically massive, news that Iraq also intends to expand its production combined with Iranian plans to expand their exports from 2.2 million barrels per day shifts the international supply situation into a bearish argument. Adding to the negative international supply tilt is the most recent weekly increase of 1.5% in global floating crude supply. While the August correction may be a temporary balancing of overbought technical and fundamental conditions, there are growing signs that both supply and demand have shifted in favor of the bear camp. In fact, evidence of expanding supply flow from Iraq and Iran is not to be discounted, especially given the inability to remove Chinese economic slowing concerns from the marketplace. Certainly, typical seasonal demand softening is widely known and somewhat factored already. However, given a very high degree of global economic uncertainty, surprises from the demand front are likely to favor the bear camp. On the other hand, the market is not without credible supply threats as the Atlantic hurricane season has clearly picked up speed with 5 separate systems currently on the radar. In a negative supply and demand development, the latest Indian oil production readings increased last month by 6.3%. Going forward, today’s weekly inventory report could be the catalyst for the establishment of the trend over the next 2 weeks, as volatility and the ebb and flow of US crude oil inventories has expanded over the last 3 weeks and is likely to be compounded by a very high US refinery operating rate.

Oil Refinery

NATURAL GAS

With a noted range down breakout yesterday and lower action today, the late season US heat wave is discounted. Obviously, the trade is not embracing confirmation of strong cooling demand even with cooling degree days running significantly higher than week ago and year ago levels. Therefore, the natural gas trade is unconcerned about developing global tightness in the coming weeks. However, the threat of a slowdown in Australian gas shipments remains with the latest negotiation news seemingly an ultimatum from the company that they have addressed employee issues. Given what has become a very active Atlantic weather pattern, it is possible that US gas prices are poised to fall relative to European and Asian gas prices as a disruption of exports from the Gulf of Mexico could back up US supply thereby prompting a buildup of US working gas in storage.

 

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