Morning Energy: Improved Demand Stories and Residual Ukraine Fears to Support
CRUDE OIL
Obviously, the Russian/Ukraine situation remains bearish to energy prices as Russian supplies are less likely to be blocked especially if further de-escalation is seen. In fresh bearish developments overnight crude oil in storage at the key European hub increased by 0.7% on a weekly basis and Iranian officials have suggested a deal is near if the West is rational. However, forecasts of $100 and $125 oil continue to surface, prompt Brent crude oil spreads have reached the highest level in years and there are reports of improving travel. In fact, Airbnb has indicated air travel volumes are up and travelers are booking for longer stays and there are also reports of increased traffic congestion in Paris. Cushioning April crude oil above the $90.00 level are reports that the US has yet to “verify” the Russian troop pullback. Overnight, the weekly API report was bullish with crude oil stocks falling by 1.1 million barrels and gasoline stocks posting a surprise decline. Furthermore, there are also reports that Cushing Oklahoma oil inventories have continued to decline, and that development could be verified with today’s EIA data. The IEA also seemed to foster bullish sentiment with their calls for OPEC plus to increase output with other sources suggesting the trade has overestimated OPEC plus spare capacity. However, a projection yesterday of record Permian crude oil production next month and projections of an increase in Bakken supply certainly creates the potential to shift the global supply and demand deficit toward a surplus reading ahead. According to Bloomberg news, Permian gas production is expected to jump by 14% this year even though some producers have permanently left the area. On the other hand, Permian Wells under current price levels can recover their costs in less than 6 months and therefore the risk to producers off the “Green Movement” is reduced. This week's Reuters poll projects US crude oil stocks to drop by 1.8 million barrels but that supportive development is partially countervailed by predictions from the polls that the US refinery operating rate would decline by 0.5%. After the close, the API survey showed a weekly decline in US crude oil stocks of 1.1 million barrels which was a smaller decline than trade forecasts.
PRODUCTS
While there are attempts to temporarily suspend the US national gasoline tax and various states have promised to reduce their taxes, retail gasoline prices saw a 1.3% gain over the prior week with all regions reporting prices reaching the highest levels in 12 months. Therefore, some retrenchment in demand could be a logical conclusion. However, overnight reports of increased traffic congestion in Paris and signs of increased travel interest suggest consumers are not price sensitive yet. This week's Reuters poll projects gasoline stocks to increase by 600,000 barrels at the same time the survey projects a 0.5% decline in the US refinery operating rate. If gasoline stocks increase by a very modest amount, they are likely to remain in deficit status relative to year ago levels. The API survey showed a weekly decline in US gasoline stocks of 923,000 barrels which contrasted with market expectations for a moderate weekly increase. From the demand side of the equation, the markets saw upbeat reports regarding traffic congestion and last week's EIA implied gasoline demand reading was promising. Uptrend channel support in April gasoline today is seen at $2.80 with the market retaining roughly $0.10 of war premium. Fortunately for the bull camp, the trade has upgraded its jet fuel demand forecast following signs that airlines and lodging companies are seeing improved traffic, with airlines adding significant seats to their summer travel schedules. The API survey showed a weekly decline in US distillate stocks of 546,000 barrels which was a smaller decline than trade forecasts. Uptrend channel support in April diesel today is $2.7410, but a close below $2.70 could potentially signal a major top.
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MARKET IDEAS
As indicated already, the big question is whether the energy complex has made a significant top or is simply in a corrective mode. Even if the markets are in a simple and temporary corrective mode, the declines could be quite significant especially if the Ukraine crisis is thought to be at an end. A normal retracement of the 2022 rally allows for a corrective setback to $86.12 in April crude, $2.6875 in April gasoline, and a setback to $2.6325 in April diesel. On the other hand, if Russian President Putin was merely repositioning his forces and the conflict resumes, yesterday's losses could be regained quickly. In fact, a trade in April crude oil back above $92.74 could reignite the bull case.
NATURAL GAS
The amount of bullish fundamental news flowing for natural gas over the last 2 days has been very significant. In addition to reports that US LNG has become profitable into Europe, combined with reports that Asian might begin to “compete” with Europe for supply, gives the bull camp ongoing confidence. While not a large amount of supply is involved the press overnight is reporting multiple LNG tankers arriving at UK and European ports and part of that gas is likely coming from the US. In fact, LNG daily storage at US export terminals has jumped recently with the trade seeing past port supply buildups as a sign of strengthening US LNG export demand! On the other hand, Russian indications that they are “ready” to keep gas flowing through the Ukraine through 2024 is a very significant negative that is being discounted early today. However, yesterday reports are that European gas flow to Germany from Russia has remained shuttered for 57th day in a row. Yet another supportive development today is ongoing cold in the eastern US and some projections that today’s storage report will show a larger than expected draw. This week's Reuters poll projects US gas storage levels to decline by 182 BCF to as much as 208 BCF. We continue to suggest traders monitor the EIA natural gas deficit relative to the 5-year average storage levels, as the market has shifted into a deficit of almost 10%. In a longer-term negative supply development, Bloomberg forecasts Permian basin gas production to jump by 14% this year. Seeing natural gas prices rally yesterday in the face of a reduction in anxiety toward the Russian/Ukraine crisis is impressive. While we give an edge to the bull camp, we are highly skeptical of the markets capacity to extend on the upside without help from today’s EIA storage report.
