Energy Brief for May 17

Price Overview

The petroleum complex traded higher on continued optimism over demand prospects as vaccination programs expand and travel increases.  While the Colonial pipeline shutdown and its impact on demand remains a concern, relief that the closure is now behind us appeared to bring out buying interest. Additional support was provided by ideas that higher demand will lead to declining stock levels throughout the summer and into the fall.

Reports from Petro Logistics that OPEC’s oil exports jumped by 1 mb/d so far in May were generally ignored.  The OPEC ministerial meeting in early April had indicated that they would gradually return over 1 mb/d to the market between May and July. with the collective production set to rise by 350 tb/d in May and June and by 400 in July.  Overall OPEC is slated to return to the market as much as 2.1 mb/d by July. This additional production does not account for potential output increases from Iran and Libya during this period. In addition, non-OPEC production should also trend higher due to the favorable prices.  On the demand side, recovery in key consuming regions will be watched closely for any changes in travel in the post pandemic period, particularly with respect to commuting trends.  India’s handling of the recent spike in infections and its impact on usage will also be considered along with the strength in the Chinese economy and the pickup in mobility and associated demand in Europe and the US for gasoline, diesel, and jet kero.

The rally of over 25 dollars per barrel that we have seen since November has for the most part priced in this expansion in demand, and prices could respond in a forceful way to marginal changes 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.  Key resistance should emerge near the 66.80-67.30 area basis July WTI crude.

The DOE report is expected by Reuters Eikon to show crude inventories increased 1.7 mb, gasoline slipped by .8 mb and distillates off by .3.  Refinery utilization is expected lower by .7 percent at 85.4 percent.

Natural Gas

In an abrupt end to the boring May trading pattern, the market gapped higher on the open and never looked back as the July ended the session at 3.164, a gain of nearly 15 cents.  Weekend weather revisions were the catalyst, as Cooling Degree Day expectations increased substantially for the coming 7-10 days, with average temperatures jumping by over 20 degrees nationally.  The warming is concentrated in the Midwest and Northeast, which gained a whopping 38 and 51 degrees respectively.  After last week saw LNG loadings slip due to maintenance and other temporary issues, flows were indicated above 11 bcf today which added underlying support.  The market appears to have overreached for the moment, as the early emergence of air conditioner usage spooked trade ahead of a summer season that is currently forecasted to produce above normal temperatures.  The quick move past the February highs at 3.128 likely indicates some stop loss buying and the emergence of speculative fund interest.  With the market losing momentum into the close, it would not be surprising to see prices give back some ground near term, with the 3.13 area as first support and this mornings gap down at 3.069 the next target.  Today’s high near 3.20 likely marks a near term top, while the 3.40 level remains our target as we move into summer.

Charts Courtesy of DTN Prophet X, EIA, Reuters