Energy Brief for May 14

Price Overview

The petroleum complex traded higher and recovered some of yesterday’s sharp losses that had been attributed to the reopening of the Colonial pipeline and concerns that high prices and shortages would impact gasoline demand in the Southeast.  Today’s recovery appeared to reflect ideas that easing of COVID restrictions would precipitate a recovery in demand that could lead to declining stock levels throughout the summer and into the fall.  The expectation that stocks will tighten was indicated by the IEA in their most recent Monthly Report on Tuesday.

Although the demand side will be watched closely, particularly in Asia given the strength to the Chinese economy and the uncertain demand trends in India, the pickup in mobility and associated demand in Europe and the US for gasoline, diesel, and jet kero will be watched closely to see if pre-pandemic trends reassert themselves.  For the most part the rally of over 25 dollars per barrel we have seen since November has priced in this expansion, and prices could respond in a forceful way to marginal changes in demand that either fall short or exceed expectations.  The supply side will also be key, and if OPEC reconsiders their production policies at the beginning of June and provide additional output it could temper the upside price response despite what looks to be impressive demand trends ahead. Of concern could be the Russian stance given recent reports that their level of compliance has begun to fall below 100 percent. The DOE report and the impact of the Colonial shutdown on stock levels will be a focus early next week. We still see key resistance near the 67.00-67.50 area basis June WTI crude.

Natural Gas

After the tight recent range was extended slightly in both directions, prices ended the week  basically where they started with the June contract settling at 2.961 verses 2.958 last Friday.  The 15 cent range we’ve seen since late April, aided by uneventful shoulder season weather, has lead to a boring month of trade.  Yesterday’s storage build of 71 bcf was below expectations and temporarily spurred prices to new highs for the month, but those gains were relinquished today as LNG flows continued their easing trend.  As the market begins to look toward the summer injection season the path of least resistance appears to be upward.  Although LNG flows have pulled back, the outlook for this summer remains positive and could continue to underpin prices.  With exports to Mexico showing signs of maintaining their upward trend the market is presented with a demand setup that it hasn’t seen for some time.  With macro concerns regarding inflation  on the rise, speculative money could also be attracted to the sector as managers search out undervalued commodities.  As we move into the summer, any trend toward above normal temperatures could spur the July contract to a test of its February high at 3.128, and beyond that to 3.40 as concern builds regarding end of injection season storage levels.  Despite the positive setup, at the moment the market remains somewhat overbought and has potential to retrench as we muddle through the end of May.  The 2.95 area basis July should offer substatntial support, with 2.897 marking a 38 percent retracement of the April rally.

Charts Courtesy of DTN Prophet X, EIA, Reuters