ENERGY: Less Anxiety From Equities Allows for Petroleum Bounce
CRUDE OIL
While the crude oil market was pummeled to a 5-day low and broke through the $105.00 support level, that washout was aggressively rejected. In fact, into the close yesterday July crude oil recovered by $6.65 and managed those gains in the face of ongoing demand destruction fears from deteriorating views toward the US economy. However, a portion of the aggressive liquidation yesterday was also the result of US efforts to increase supply flow from Venezuela and from pressure on Saudi Arabia to raise output. On the other hand, Chinese April purchases from Saudi Arabia jumped by 38% which is obviously an artifact of the embargo. In another negative supply-side development China apparently has acquired another 2 million barrels of Iranian oil for its strategic supplies and that oil was mostly unavailable to many global buyers because of Iranian sanctions. In other words, two million barrels of unexpected supply surfaced this week. To a degree the crude oil market deserved this week's $10 washout, as global psychology continued to deteriorate significantly yesterday off fears that high prices would reduce demand and that the Fed may cause a recession. Obviously, signs that Venezuela might be allowed to export more oil and news that President Biden will visit and pressure the Saudi king this summer to expand output tempers supply fears. In our opinion Venezuela will be hard-pressed to quickly add significant volume to the world equation. We also doubt Saudi Arabia's ability to expand output enough to begin to replace a large portion of lost Russian supply. Therefore, the key driving force for energy prices ahead will be views toward demand, which are likely to be heavily influenced by action in equities. This week's EIA report was very bullish to crude oil, with a much larger than expected tightening of crude stocks, evidence that US strategic supply is falling at a record pace (to meet world demand), and a significant jump in US refinery activity, and this should keep bullish buzz in place. With Russia likely offering India and China significant discounts, a certain amount of Russian oil will continue to flow. On the other hand, reports are that the US is shipping record amounts of crude to Europe and that should continue to eat up a large portion of the releases from the US SPR.
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PRODUCT MARKETS
While the gasoline market yesterday also fell precipitously because of a spike in energy demand fears, the market aggressively rejected the spike down and has forged a higher high early in the session today. With the aggressive rejection of the washout, RBOB should have balanced the overbought technical condition into this week's high. Given record Asian refinery margins the incentive to refine more products globally is there but that also indicates an unsolved tightness. Furthermore, European refiners are also battling for input supply and occasionally seeing margins fluctuate wildly. In the end, a major rebuilding of global gasoline supplies into the northern hemisphere driving season is unlikely and time is slipping away before the season starts. In minimally negative developments yesterday, Singapore weekly fuel stockpiles increased 1.1%, and there are reports of significant arbitrage gasoline on its way to the US from Europe. This week's ARA gasoline stocks declined by more than 300,000 tonnes, and that seems to confirm reports of European exports. From a technical perspective, the gasoline market in last week's COT positioning report held a spec and fund net long near its lowest level since July 2017. The aggressive washout this week likely removed many weak-handed longs. Expect volatility to continue, with suspect RBOB support at $3.5950 and initial resistance today seen at $3.750. Not to be left out, the diesel market also spiked lower in the face of a broad market capitulation which was accentuated by a second straight day of massive declines in US equities. From a technical perspective, the July ULSD contract extended the May washout to a very startling $0.51 before rejecting that washout with a low to high rally of $0.24. In looking at the last COT positioning report and considering the $0.25 decline since that report was compiled, ULSD futures might have been net spec and fund short yesterday. From a supply perspective, we see the $3.50 level as very strong value, especially with Singapore light and middle distillate inventories falling and ARA (European) fuel oil and gas oil stocks also declining. While the diesel market will continue to fret over the potential for softening demand, seeing UK prices hit a high yesterday and given the ongoing effort to repair US supply chains, we see expanding Trucking fuel consumption and view this week's low as a solid low.
MARKET IDEAS
Obviously, the massive range down extensions in the petroleum markets yesterday were based on the conclusion that the world economy and energy demand was poised to slow quickly. Granted, the question of slackening energy demand will linger, but in our opinion, tightening supply is going to outpace any losses in consumption. Therefore, we see a key pivot point in July crude oil today at $108.04, with a more significant uptrend channel support line seen all the way down at $102.08. In the end, we are much more confident in projecting respect of specified chart support points than we are of a straightaway extension of the bull trend. In conclusion, without a very positive Friday morning equity market track the markets remain vulnerable.
NATURAL GAS
While the natural gas futures gyrated wildly yesterday, they ultimately found chart support at the $8.00 level. However, the July natural gas contract this morning has returned to yesterday’s spike low level and has a slightly higher bull/bear line at $8.05 today. Certainly, seeing a shift into a questionable risk on environment, a 14% increase in British wholesale day ahead prices, notice that Russia will halt gas flows to Finland tomorrow all provide fundamental support for the market. However, Finland is apparently moving quickly to substitute Russian supply with the purchase of floating supply tankers in Helsinki. With US LNG margins becoming even more profitable to Europe, US exports should continue at a pace allowable by capacity restraints. In our opinion, increased natural gas production is only resulting in normal injection season builds and that in turn highlights the impact of the European situation on the US gas market. Obviously, aggressive stockpiling and reserve-filling is "pulling demand forward," but that action is likely to continue and possibly accelerate. This week's EIA storage level came in at the middle of the range of expectations, but US inventories remain significantly below the 5-year average for this time of the year. When one considers the rush to find fresh sources of non-Russian gas, the level of US inventories becomes extremely important! The report showed an injection of 89 bcf last week. Total storage was 1,732 bcf or 15.2% below the 5-year average. Over the last four weeks natural gas storage has increased 282 bcf. While we think natural gas can grind out gains in the face of deterioration in global economic sentiment, gains now are likely to coincide with very significant volatility. On Thursday, the July natural gas futures contract saw a range of $0.60 highlighting the volatility environment. In a normal market environment, we would see the $8.00 level as credible support level today, but the direction of gas futures today might be heavily dictated by equity market action.
