Energy Market Update 8-1-2024

Crude is up 67 cents         RB is up 1.99 cents           ULSD is up 2.20 cents

Overview

Energy prices are being boosted further today by the worry over heightened tension in the Mideast, the good DOE data and signals of a September rate cut by the Fed.

Iran’s supreme leader Ayatollah Ali Khamenei has issued an order for Iran to “strike Israel directly” following the killing of Hamas’ political leader Ismail Haniyeh in Tehran overnight, according to a report Wednesday from the New York Times. Earlier, Iran's leader Khamenei said it was Iran’s “duty” to avenge Haniyeh’s death since he was killed inside Iran.

The DOE data seen Wednesday showed crude supplies falling for a 5th straight week. In addition, gasoline supplies fell more than expected. Crude inventories drew by 3.436 MMBBL, beating estimates for a draw as big as 2.7 MMBBL. Crude exports rose by 733 MBPD, leading to the draw. Refinery runs fell by 257 MBPD to a total 16.15 MMBPD. Gasoline inventories fell by 3.665 MMBBL, beating estimates that saw a draw of as much as 1.3 MMBBL. Even as gasoline demand fell by 206 MBPD to a total of 9.25 MMBPD, it stayed above the psychologically strong summer demand level of 9 MMBPD. Distillate supplies built by 1.534 MMBBL, which was contrary to the small draw of near 1 MMBBL that was forecast.

A meeting of the top ministers of OPEC+ has kept oil output policy unchanged, two OPEC+ sources said while the meeting was under way. (Reuters)

The Fed signaled that it is closer to a rate cut in September. Fed officials hinted in a policy statement that they are inching closer to the confidence needed to lower rates as inflation continues to cool and the job market slows. Powell was asked Wednesday afternoon if the Fed could remain nonpolitical with a September rate cut. "I absolutely do," he said.  (Yahoo Finance)

Goldman Sachs blamed soft fuel demand in China and the resale of some crude cargoes by the Dangote refinery in Nigeria for dropping Brent crude prices below $80/bbl.  Still, the bank said this week that it believes refined product margins will recover from depressed July levels. Its analysts said processors have already cut runs because of lower margins or unplanned maintenance and predicted that diesel futures are likely to strengthen.

A Reuters analyst details how Asian crude imports have slumped.  Asia's crude oil imports dropped to the lowest in two years in July as demand remained weak in top importer China and eased in number two India. A total of 24.88 MMBPD arrived in July in Asia, the world's biggest oil importing region, down 6.1% from the previous month and the lowest on a daily basis since July 2022, according to data compiled by LSEG Oil Research. For the first seven months of the year, Asia's imports averaged 26.78 million bpd, down 340 MBPD from the same period in 2023. The IEA has forecast that China would represent 40% of their expected near 1 MMBPD demand growth for 2024. That would suggest that Chinese growth would be about 388 MBPD. Yet, if LSEG's estimate of China's imports of 10.53 MMBPD for July is confirmed in official trade data expected next week, it would mean arrivals of around 10.98 MMBPD for the first seven months of the year. That would mean a drop in the first 7 months of 2024 of 240 MBPD from 2023's level. Outside of China, there is little reason to be optimistic about a pick up in Asia's demand for crude, with India's imports slipping to 4.54 MMBPD in July from 4.76 MMBPD in June and 5.14 MMBPD in May. A seasonal easing of imports is likely as India's monsoon season approaches, but they should recover after the wet season given solid economic growth in the South Asian nation amid an infrastructure boom. Elsewhere in Asia, demand for crude is being capped by lackluster economic growth and weak margins for refiners.

Technicals

Momentum is positive for the energies.

WTI spot prices have risen in to the gap on the DC chart that goes up to 79.17, which we see as resistance. Today's high is 78.88. Above the gap we see good resistance up at 80.60-80.69. Support lies at 77.63-77.69 and then at 76.40-76.43.

There is a rollover gap currently on the ULSD DC chart. The gap goes from August's high yesterday of 2.4209 to today's September contract low of 2.4433. DC chart based support lies just above that at 2.4220-2.4230.

RB spot futures have support at 2.43 and then at 2.4126-2.4133. Resistance lies at 2.4728-2.4734 and then at the August expiration's high yesterday of 2.4898. The AAA reports that today's average gasoline price at the pump in the u.S. is $3.483, which is the lowest price since June 25th.

Natural Gas --NG is up 4.3 cents

Natural gas spot futures are up as the market wrestles with high production and some recent dialing back of weather forecasts for mid-August versus the next few days of very hot weather, improved feed gas volumes for LNG export seen the past week or so and strong gas power burns seen recently.

U.S. natural gas futures slid about 4% on Wednesday on rising output and forecasts for less hot weather and lower gas demand next week than previously expected. LSEG sees demand this week at 105.3 BCF/d and next week's at 110.7 BCF/d. These estimates are down a total of 1.3 BCF/d from Monday's estimates.

Spot gas prices for July 31 at the Waha hub in West Texas turned negative for a third time in July even as a record-breaking heatwave could boost U.S. power demand. The only way for prices to stay in positive territory is through new pipeline capacity that is needed, as per an LSEG analyst. There is, however, only one big gas pipe actually under construction in the Permian at this time - the Matterhorn Express Pipeline. The Matterhorn Express pipeline is projected to be capable of moving up to 2.5 BCF/d of gas from the Permian to the Gulf Coast. The pipeline was expected to enter service in the third quarter of 2024, but most analysts now expect the project to start in the fourth quarter.  (Reuters)

The EIA storage data due out today is seen as a (slightly bearish) build of 31 to 34 BCF, as per Reuters and WSJ surveys. This compares to last year's build of 15 BCF and the 5 year average build of 33 BCF.

After peaking in 2023, Lower 48 well costs are expected to decline 10% in 2024 and 1% in 2025, according to a recent report from Wood Mackenzie. Lower pricing for OCTG (specialized tubes used in the exploration and production of oil and gas) , proppant ( i.e. sand used in fracking) and diesel fuel, combined with substantial drilling and completion efficiency gains, have helped reduce E&P costs. However, additional reduction will be difficult in this environment, as oilfield equipment and services companies seek to keep margins high, Wood Mackenzie adds. “The largest oil producers with the scale to commit to longer-term contracts (one to three years) for new equipment and technologies will realize additional efficiency gains and keep costs lower,” said Wood Mackenzie's analyst “Smaller producers will be most exposed to inflation headwinds — arguably motivating even more M&A activity in the region.” (woodmac.com)

TTF futures prices have risen quite a bit in the past week as September has become the spot futures contract. The heightened Mideast tension is supporting TTF prices, as per Bloomberg reporting. Is the price rise also a function of slowing supply due to lower LNG imports? LNG flows to Europe have been about 30% lower than average in July, ship-tracking data shows. Meanwhile, outages at Norwegian fields have further tightened the market. (Bloomberg) Technically, the TTF contract is attacking the DC chart's upper bollinger band. The bollinger lies at 36 Euros/Mwh. DC chart based resistance at 36.60 Euro/Mwh has been tested with a high today of 36.865 Euro/Mwh. Next resistance lies at the major high from May at 38.70 Euro/Mwh. Support below comes in at the 34 Euro/Mwh.

The TTF price rise comes despite recent data that shows natural gas-fired power generation in Europe declined 16% year/year during the first half of 2024, driven partly by a sluggish recovery in industrial demand across the continent, according to the European Union energy watchdog. Gas-fired power generation also declined amid mild weather, stronger renewable output and household energy efficiency, according to the EU Agency for the Cooperation of Energy Regulators. (NGI) Another source says that renewables are displacing thermal generation so fast that gas-fired power has slumped to a two-decade low. Continental Europe produced less electricity from natural gas over the first seven months of this year than at any time since 2005, according to research by Energy Flux.

NG futures have positive momentum as the spot contract is currently having an inside day. Support lies at 1.991-1.994, and then at 1.913-1.921. Resistance lies at 2.149-2.155 and then at 2.208-2.218.We wonder as we look ahead whether NG pricing is currently shaping up as a tussle between the end of summer demand and elevated storage levels versus strong feed gas volume supported by firm overseas prices in Europe and Asia, continued strong power burns and the remote possibility for producers to have to shut in more gas as the price has slipped back to near $2.

Disclaimer

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