Energy Brief June 22

by Steve Platt and Mike McElroy

Price Overview

The petroleum complex traded higher as the market assesses prospects going forward.  OPEC+ production cuts continue to balance the market as demand recovers globally following a record large decline in consumption during the 2nd quarter.  Questions over the recovery in demand persist as spikes in COVID-19 infection rates are evident in many areas, particularly emerging markets such as Brazil.  However the weakness in the dollar along with the strength to equity values has helped ease concerns over sustained price weakness and raised hope over recovery prospects.  
Despite the more optimistic tone, the long position held by large funds did begin to see signs that it is being pared back at current price levels.  In addition Russia has indicated that it would be satisfied by Brent prices holding to a range of 40-50.  At these levels they see the market continuing to discourage any large scale expansion in shale production due to cost considerations while demand would be able to be sustained under a more normal economic scenario.  Of more immediate concern to values is the weakness in margins that has continued to persist due to large product inventories and tepid demand.  In addition demand remains uncertain given the potential for a decline in global economic growth.  Full year economic growth is forecast  to decline by 3.4 percent globally, but considerable risks to the outlook persist linked to the progression of the pandemic and unexpected surprises that might be linked to the growth in debt, political disputes including Brexit and the Sino-US trade dispute, and mounting social instability. 
With economic growth expected to decline, the pressure on petroleum demand is likely to be pronounced given the sharp contraction apparent 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 directly linked to the ability of OPEC to control production and  balance inventories.  The market’s ability to advance following the Price Monitoring Committee meeting without any additional action seems to suggest that current price levels are sustainable.  We remain unconvinced given what looks to be a stalling out of US cuts in production, which in turn could prompt action on the part of OPEC to preserve market share.  Subsequently, we see recent highs near 40.60-41.40 basis August in WTI and 43.40 on Brent as intermediate tops for the crude oil market. 

Natural Gas

The August neared the 1.80 level early in the session as good follow-through was seen to the rally from late last week, but prices faded to end the session.  An intraday high was put in at 1.787 before the market settling lower by 1 cent at 1.738.  The early strength appeared technically driven as fundamentals were mixed to negative.  Production ticked up over the weekend as the stubborn 88 bcf/d level remains difficult to violate consistently.  Weather demand saw revisions to fewer CDD's expected in the two week forecasts, although still well above normal.  Early indications put LNG flows at 4.1 bcf today, a welcome improvement from Friday's 3.6, which helped generate support.  Despite the recent price improvement, the market still needs positive developments to stage any sort of significant rally in the summer months.  Production levels need to return to their downtrend soon, and the warm temperatures seen in June need to portend continued above normal trends for the rest of the summer to overcome overhanging demand issues from COVID-19.  The market is waiting impatiently for these signs to emerge, and will likely have trouble reaching beyond the 1.80 area until these develop.  The 1.90 area remains the next target if the market can break out of the downtrend channel from the late May highs.

Charts Courtesy of DTN Prophet X

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