Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex attracted scattered selling interest to settle 24 cents lower at 78.40 on the September crude oil. Although supplies remain tight in the near term as reflected in the widening backwardation, concerns over inventories building in the 4th quarter and 2025 weighed on values. Uncertainty over Biden’s withdrawal from the US Presidential race also was in the background, as questions arose as to how it might impact the dollar, capital investment and environmental policies and regulations.
The Chinese economy remains the key component for the oil price outlook. The cut in the repo rate by their Central Bank from 1.8 percent to 1.7 percent following the Communist Party Third Plenum meeting did not appear strong enough to reverse their domestic economy. The meeting signaled no major shift in economic policy, which has been focused on investment in manufacturing and infrastructure rather than boosting consumer demand. The failure to make domestic consumption a driver of growth will restrain their growth along with limiting oil consumption. With estimates suggesting that OPEC and non-OPEC supply to grow by 2.5 mb/d next year, it is poised to exceed demand especially if Chinese growth remains lackluster. OPEC+ is scheduled to begin unwinding voluntary production cuts in October, but whether it occurs is an item of speculation. They will hold a joint ministerial monitoring committee meeting on August 1st to review the market and no change in policy is expected.
The likelihood of further inventory declines will provide underlying support to values as evidenced by the widening backwardation, despite the move below the 100-day moving average on September crude at 78.80. The next level of support arises near the 77.00 area.
Caution ahead of the DOE report on Wednesday is likely given recent stock declines, with forecasts indicating a drop in crude stocks of 2.5 mb, distillate unchanged and gasoline lower by .5 mb. Refinery utilization is expected to lose .3 to 93.4 percent.
Natural Gas
Upside momentum was maintained to kick off the week as the August contract gained 12.3 cents to settle at 2.251. Overall news flow did not have a bullish bias, but the steady return of operations at Freeport, with early nominations today at 1 bcf, was enough to flush out additional buying and give the market signs of life after weeks of negatively trending prices. Near term weather has seen lackluster demand, but the 10-15 day period has the potential to produce the warmest temperatures of the summer to assist the upside swing. Prices easily pushed through the 9-day moving average, with the next level of resistance coming in at the 20-day near 2.40, and beyond there at 2.473, which would achieve a 38 percent retracement of the June-July break. The 9-day moving average near 2.20 now becomes initial support, with little below there until a retest of the lows near 2 dollars.
**The Energy Brief will be discontinued on July 26, 2024.
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