Energy Brief For June 15

by Steve Platt and Mike McElroy

Price Overview

The petroleum complex came under pressure in overnight trade as weakness in equities linked to a spike in COVID cases raised fears the recovery in global economic growth, evident in late May, might slow.  Offsetting these fears and encouraging buying at the lower levels was the increase in Chinese industrial output, which rose 4.4 percent above a year ago after falling 13.5 percent in the first quarter.  Support was also traced to the late strength in equities and hope non-compliant members of OPEC+ were poised to cut production in line with targets ahead of the monitoring committee meeting scheduled for Thursday. 

Also being watched is the DOE report which is expected to show crude inventories building by .5 mb, distillate stocks increasing by 2.7 mb and gas stocks off .2 mb. Refinery Utilization is expected up .9 percent to 74.  

Although the potential for demand to recover as economies open up has helped underpin values, how quickly it recovers continues to be a key consideration.  The monthly reports by the International Energy Agency on Tuesday and the OPEC on Wednesday should help clarify prospects with respect to consumption in key areas such as China, India and the US.  Ultimately how quickly the market can be re-balanced with excess inventories being drawn down will determine the outlook for prices.  Of critical concern and has been the reduction in refinery runs, with utilization at only 73.1 percent compared to 93.2 percent last year.   Although the pickup in disappearance levels of gasoline has supported the cracks, they remain well below year ago levels. The August gasoline crack moved up to as high as 13.00 recently.  The market will need to sustain steady increases in gasoline disappearance to draw down excess inventories in order to maintain margins above the 9.00 level in the August crack.  Recent reports of increased refining in China appear to reflect purchases of cheap crude over the past few months when prices were significantly lower.  The refining of this crude and the production of products including gasoline could burden the Asian products market unless consumption rates can increase significantly to absorb these supplies. 

Natural Gas

Prices continued to succumb to selling pressure as new lows were made in the July through October contracts.  Moderate near term temperatures and weak demand for LNG cargoes initiated the weakness.  Macro fears emanating from signs of COVID-19 cases increasing in some areas have rekindled concerns regarding the pace of demand recovery and added to the pressure, while production has stubbornly held steady in the face of the demand issues.  Friday's Baker Hughes report showed an increase of 2 gas rigs, further fueling concern that production will stabilize.  With the weak action today, the May contract lows near 1.50 now become a potential target, but with weather warming into the second half of the month we expect some better support to emerge as the week wears on, with potential for a recovery up to 1.84 and possibly still a chance at 1.90 ahead of the July expiration.

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Charts Courtesy of DTN Prophet X