Energy Market Update 5-23-2024

Crude is up 86 cents July RB is up 3.95 cents July ULSD is up 3.38 cents

Overview

Energies have risen off strongly their overnight lows. WSJ commentary reads as follows today : " This lower-for-longer production and oil-demand growth tracking above historical averages points to strengthening prices in the second half of the year, analysts say." However, many news wire accounts point to a wait and see attitude for oil prices until the June 1 OPEC+ meeting. Bloomberg cites a weaker U S dollar and strong equity markets for supporting energy prices today.

The DOE statistics were overall disappointing, although we see some items that we believe are supportive. Crude supplies rose by 1.825 MMBBL, which was less than the build seen in the API data, but was worse than the forecast for a draw 2.5 MMBBL. Yet, crude inputs to refineries rose to a 4 month high of 16.482 MMBPD, rising 227 MBPD on the week. Also, net crude imports fell by 676 MBPD to below 2 MMBPD, with volumes from Mexico hitting a record low of 184 MBPD (LSEG). But, Cushing supplies rose to their highest amount since July. (Bloomberg) Gasoline stocks fell by 0.945 MMBBL, in line with estimates. Gasoline demand rose by 440 MBPD to a strong 9.315 MMBPD, beating 2022 demand by over 500 MBPD, but lagging last year's level by 120 MBPD. Distillate demand rose by 52 MBPD to 3.883 MMBPD, which is in line with demand seen 2 years ago, but lagged last year's level by 300 MBPD. We see one possible negative for the products. Distillate and gasoline outputs have risen to very high levels. Gasoline output stood this week at 10.049 MMBPD and distillate's at 5.064 MMBPD. If these levels persist supplies will likely rise in the coming weeks.

The energy markets did not take kindly to the Fed minutes released Wednesday afternoon, with Fed officials noting "disappointing" inflation readings and suggesting that rates need to be held steady for longer if inflation does not fall. This befits the narrative heard the past 2 days in which news wires spoke of energies falling due to rates staying higher for longer.

Russia exceeded its OPEC+ production quota in April for "technical reasons" and will soon present to the OPEC Secretariat its plan to compensate for the error, the Russian Energy Ministry said late on Wednesday. "Russia is fully committed to the OPEC+ agreements and plans to compensate for its failure to carry out the production plan", the Energy Ministry said. (Reuters)

Technicals

Momentums are positive for the energies. Price fell overnight to fresh lows for the recent selloff, but have risen strongly off those lows.

ULSD support in July futures is seen at 2.4375-2.4385. The overnight low is 2.4303. Resistance comes in at the 2.50 area.

July RB support lies at 2.4505-2.4520. The overnight low is below that at 2.4445. Resistance comes in at 2.5045-2.5055 and then 2.5180.

July WTI support is seen at 77.17-77.25 and then at 76.70. Resistance lies at 79.30-79.32 and then at 79.96-79.99.

Natural Gas- July NG is up 8.0 cents

NG prices have forged a fresh high today for this strong rally. Texas heat, strong power burns, strong flows to the LNG export facilities and a drop in the storage surplus remain the drivers. As one analyst says: " buyers are in control".

The natural gas storage surplus has shrunk in recent weeks and is likely to do again today, but as Celsius Energy points out, the surplus has shrunk by "only" 80 BCF since peaking in mid-March at +678 BCF. Their conclusion was : " there is till more work to be done". The EIA storage number today is seen as a build of 85 to 89 BCF as per WSJ and Reuters surveys. This compares to last year's build of 97 BCF and the 5 year average build of 92 BCF.

TTF prices today have risen to their highest value for the spot futures since December 27, 2023. This increase follows an announcement by OMV, an Austrian energy company, indicating a potential disruption in Russian gas flows to Austria due to a court ruling that could impede payments to Gazprom Export for delivered natural gas. The implementation of the court decision remains uncertain. The supply in jeopardy consists of 6 billion cubic meters (211.8 BCF) annually, which Gazprom provides to OMV under a long-term contract for delivery into Austria. Austria is heavily reliant on Russian gas, with 93% of its gas imports in March originating from Russia. (Investing.com) TTF prices have today filled the gap that existed prior on the DC chart from 35.200- to 35.500. We see upside resistance now at 37.70 Euro/Mwh and support just below 31 Euro/Mwh.

LSEG forecast gas demand in the Lower 48, including exports, would ease from 92.6 BCF/d this week to 91.8 BCF/d next week. These contracts with Monday's forecasts for this week of 91.6 BCF/d and next week 92.2 BCF/d.

Gas flows to to the seven big U.S. LNG export plants rose from an average of 11.9 BCF/d in April to 12.7 BCF/d so far in May with the return of Freeport's facility. On a daily basis, flows to Freeport were on track to reach an 11-month high of 2.2 BCF/d on Wednesday, up from 2.1 BCF/d on Tuesday. (Reuters)

A law firm from Texas did a survey of private equity firms, energy producers and oil services companies. The survey respondents see the price of natural gas reaching $3 next year as data hungry centers boost the demand for electricity and hence for natural gas. One of the law firm's partners said that they were seeing natural gas producers being " a little less aggressive" in their price hedging, given the low price for gas seen earlier this year. As for oil, the survey found respondents largely bullish, with one-fourth expecting a significant increase in bankers’ willingness to lend to crude-focused drillers. "But natural gas market distress is “countering the oil boom.”", another partner at the law firm said. (Bloomberg) Among reactions we have seen to this news article, were the statement that gas prices for the summer have already reached $3.

Preliminary open interest in NG futures on the CME from yesterday's trading shows a total increase of 18,415 contracts, even as the soon to expire June contract saw open interest fall by 16,968 contracts. The total increase was driven by increases in July, August and October. We lean to new longs having been added, which reinforces the analyst's comment seen above of "buyers in control". This even as various banks and other analysts suggest that NG is overvalued or near its peak. "Citigroup's commodities team believes the rally has run out of steam." The bank's price target of $2.50/MMBtu set in March has been exceeded. Its analysts believe most of the advance was tied to short covering and that large commodity funds are maintaining neutral positions in the market. While Citi said it believes natural gas increases have ended for now, they cautioned against upside risks this summer. Record heat could lead to additional price gains, they add. (OPIS)

Yesterday saw a large amount of July $2.50 puts added to open interest. The $2.50 puts were sole against buying of the $2.90 puts. This trade was done in tandem with the selling of the July $3.50 call against which the $3.75 call was bought and in addition there was a 19 delta purchase of July futures at a price of $3.04. On the flip side, the $2.50 put was purchased in a separate trade against selling of the $2.25 put. In addition, a large trade was seen in the Calendar Spread Options. The October January calendar spread option 0.75/0.50 call spread traded 5.0 and 5.1 cents over 6,000 times. It is possible that this was due to one trader having to close out a trade that was on the wrong side. We had heard prior from a colleague that a large fund was stopping out on Front to Back spread.

Technically, as per Reuters comments, NG remained in overbought territory for a 14th day in a row for the first time since June 2016. Although, we do not see where the overbought territory may have started that many days ago. Month-to-date the spot futures contract is up 42.74%. (WSJ)

The RSI indicator for July is over 77 on the daily chart, underscoring the overbought condition. Resistance for the July futures lies at highs seen in November of 2023 at 3.126, tested with a high today of 3.135. Above that resistance lies at 3.209. Support lies at the overnight low at 2.980-2.984.

Disclaimer

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