Energy Brief June 29

by Steve Platt and Mike McElroy

Price Overview

The petroleum complex traded higher as the ongoing economic recovery in China and Europe offset concerns that an increase in COVID-19 cases in the US and Brazil would lead to a contraction in global economic activity.  Reports that OPEC production had declined by 1.25 mb/d in June according to Petrologistics Tanker Tracker raised hope that OPEC was moving closer to full compliance as Nigeria, Iraq and Kuwait lowered production.  Although confidence remains high that decreasing production will help balance the market, the key uncertainty remains demand and when some normalcy returns to key economies. 

The uncertainty over economic prospects, particularly for the US, continues to provide a backdrop for selling interest.  Although the ability of other major economies such as China and Germany to show improvement has helped provide a glimmer of hope that things are beginning to stabilize, the rise in infection rates in the US has dimmed the optimism that the easing of lockdown restrictions would lead to a steady recovery in petroleum demand.  Nevertheless production restraint continues to underpin values with declining rig counts to record low levels in North America suggesting further decreases are in store longer term, while recent declines in Iraqi exports of 9 percent in June, or 310 tb/d, suggests that they have delivered about three-fifths of their pledge under the OPEC+ deal. 

To a large extent the recent production cuts have been discounted and the market will be looking for verification that stocks are beginning to be drawn down. Demand will be key and the possibility that air travel will be curtailed into next year suggests gasoline demand will need to continue expanding in the US to maintain refinery runs.  This would imply more normal work patterns and increased commuting will need to occur in major metropolitan areas. The DOE report will be watched closely for the pace of builds in both commercial stocks and the Strategic Petroleum Reserve of crude oil.  For now we are unconvinced that the pace of economic recovery from the pandemic and  OPEC+ pledged commitment to keeping production low is enough to avoid further builds in stocks, particularly if OPEC production rises after July and still see valuations much above 41.00 as unsustainable.   

Natural Gas

We had expected some price recovery but did not think it would all come at once.  The August gained over 20 cents intraday and ended the session at 1.709, a jump of over 16 cents.  Weather ignited the rally as CDD expectations increased across all models on the short term as well as two week forecasts, and consumption showed improvement as well, with day-ahead up over 5 bcf.  Production stayed under 88 bcf/d through the weekend which added to underlying support on hopes for additional slowing.  The announcement Sunday by Chesabeake Energy that they were declaring Chapter 11 bankruptcy added support as it portends additional decreases in production.  Despite the supportive fundamentals the spike higher looks to be a little too much too fast.  Questions still abound with COVID-19 cases increasing in the US and and a large storage surplus both domestically and globally.  The action today certainly makes it appear as though a bottom is in, but look for possible setbacks to the 1.65 range before continuing up to test the downtrend channel and likely find initial resistance in the 1.80 area.

Charts Courtesy of DTN Prophet X

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