The petroleum complex traded under modest pressure, with values succumbing to doubts that demand will be sustained. Both the EIA and OPEC monthly reports saw some optimism over demand prospects following the easing of lock-downs. However concerns of further challenges linked to not only the pandemic but also to mounting debt loads and trade issues continue to undermine values.
With economic growth expected to decline globally, the pressure on petroleum demand is likely to be pronounced given the sharp contraction in the hospitality and transportation sectors. Although the injection of liquidity by Central Banks has helped avert a deeper crisis, the ability to support the market will be inextricably linked to the ability of OPEC to control production and balance inventories.
The DOE report did little to dispel this uncertainty. Crude stocks continued to build, rising by 2.9 mb with the SPR accounting for 1.2 mb. Although gasoline inventories fell by 1.7 mb, gasoline disappearance domestically was stagnant against last week despite the easing of lock-downs, totaling 7.9 mb compared to 9.9 a year ago. While some encouragement was taken from distillate inventories falling by 1.4 mb, refinery utilization at 73.8 percent rose modestly but remains low. Weak margins continue to keep crude inputs to refineries low at 13.6 compared to 17.3 mb last year. Total petroleum stocks continue to build, rising by 8.8 mb. Of interest were crude production levels which showed a decline to 10.5 mb/d compared to 12.2 a year ago.
Tomorrow the OPEC monitoring Committee meets and should report back the level of production for non-compliant members and whether they have moved into compliance with the agreed output levels. This will become a hot talking point as we move into July and the extension of OPEC+ production levels are debated.
The market attempted to get off the matt today as warming temperatures gave a glimmer of hope that the lows may be in. The 1.60 area in July has held up to selling pressure over the past two sessions, but with Henry Hub cash prices near all-time lows at 1.43 yesterday there needs to be some convergence in the next week. Weather remains a somewhat positive influence as June continues to stack up as one of the hottest on record, but that is old news as it has been the consensus for some time. The overhanging issue continues to be burgeoning stocks both domestically and abroad due to poor demand precipitated by the COVID-19 pandemic. LNG exports have been dismal and look to remain that way through the summer. Production has shown some signs of falling further, but at this point has held fairly firm in the 88 bcf/d range. With current headlines indicate COVID-19 cases spiking in some areas that have lifted restrictions, the market seems unable to catch a break from the bad news. With a week until expiration the July has likely run out of time to recover. As we turn our attention to the active August contract, a reversal on the chart today could signal a bounce as temperatures continue to warm. Initial resistance should surface in the 1.80 area.
Charts Courtesy of DTN Prophet X
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