The petroleum complex attracted early buying in response to yesterday’s API report, which showed a large draw in crude stocks of 6 mb. That number was confirmed by this morning’s DOE release, which indicated that crude inventories fell by 8.5 mb compared to expectations for a decline of 1.8 mb. Product stocks also fell with gasoline off 1.8 mb and distillate off .9 compared to expectations for -1.2 and +1.2 respectively. Despite the larger than expected declines the market came under modest pressure from early highs as the focus turned to the rebound in US production levels. The recovery was pronounced as the lower 48 jumped back to 11.8 mb/d from 10.8 last week, with total production at 12.2 mb/d.
The Federal Reserve lowered their target rate ¼ point near the end of the session as expected, with little immediate reaction from the market as it had largely been priced in. With the return to the table of US and Chinese trade negotiators coming to pass yesterday with no progress seen, the demand concerns remain a limiting factor on the upside.
As we expected the Fed cut has had a muted impact with outstanding trade disputes remaining unresolved. Although there are indications that Saudi’s have cut output beyond their commitment levels, it appears that Russia is replacing Iranian barrels in Asia. With a flexible production quota under the OPEC agreement, they have been able to fill the gaps left by lost Iranian barrels. This continues to be of concern as both Russian and US replace Saudi crude in key Asian markets. Nevertheless US crude inventories will need to be monitored given the weak premium of Brent to WTI and the impact on the spread from the availability of Saudi wet barrels.
Despite mixed signals the market did manage to forge a new high for the week and settle above the 200 day moving average of 58.15, which could signal a near term test of the 60.00 area basis September crude.
Prices surprised to the upside today as September natural gas probed above 2.26 intraday before ending the session over 9 cents higher at 2.233. The rally started after the 2.10 level reached on Monday held support during yesterday’s session and scattered buying began to surface this morning due to slight improvements indicated for demand into the middle of August. The weather was far from enough to justify the move, as short covering and technical buying interest then supplied much of the strength on the oversold status of the market. Tomorrow’s storage report is forecast to show an increase of 52 bcf compared to the five year average of 37. If the recent lows can hold up to another above average addition to stocks, it could indicate that a major low has been put in.
Charts Courtesy of DTN Prophet X
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