Energy Market Update 7-30-2024

Crude is down 63 cents September RB is down 2.35 cents September ULSD is down 1.76 cents

Overview

Energies are lower, having fallen further today to multi week lows, as demand concerns mainly out of China weigh on the market. WSJ commentary adds that prices are also being pressured by speculative selling across large parts of the commodities complex.

Chinese leaders signaled on Tuesday that the stimulus measures needed to reach this year's economic growth target will be directed at consumers, deviating from their usual playbook of pouring funds into infrastructure projects. The news comes as the Chinese leaders ended their Communist party's key Politburo meeting. As expected, no specific steps were announced, but the leadership pledged to "timely launch a batch of incremental policy measures". (Reuters) The market is now anxiously awaiting the July PMI data from China. The official reading is due out tomorrow, followed Thursday by the reading from the data company Caixin. The official purchasing managers' index (PMI) was forecast at 49.3, down from June's reading of 49.5, according to the median forecast of 31 economists in the Reuters poll. The private sector Caixin factory survey is expected to show a reading for July of 51.5, down from June's level of 51.8.

ING said in a note that "China is important for the global oil balance, as it is expected to make up more than 50% of global oil demand growth in 2024, so slower-than-expected growth can dramatically change the balance." (MarketWatch) In regard to the upcoming OPEC+ joint ministerial monitoring committee (JMMC) meeting, ING writes: "The oil market will be keeping a close eye on the OPEC+ meeting later this week in case there are any signals of a change in output policy following the more recent price weakness," "If there are any surprises, they would likely come in the form of delaying the start of the gradual easing in supply cuts, which is set to start in October." (Barron's)

China's overall crude throughput is set to recover in July and August after reaching a six-month low in June as scheduled refinery maintenance winds down. But throughput levels will remain lower on the year amid weak domestic demand, sources and analysts told S&P Global Commodity Insights on July 30. This weakened demand is expected to continue weighing on the country's annual crude throughput for the year. July throughput is said to have averaged 10.23 MMBPD, running at 83%. This month's run rate is up from last month's run rate of 9.94 MMBPD or 80.6% of capacity. Last year in July, refiners operated at 85.6% of capacity, running at 10.41 MMBPD. The operating rate at China's small independent refineries edged up to 53% in July from a four-year low of 52% in June, although this was still significantly below the 62% in July 2023, according to local information provider JLC. August maintenance will see 420 MBPD offline. This compares with 930MBPD being offline in July and 1.34 MMBPD in June. (Platts)

We failed to mention yesterday the large drop in money managers' net length in Gasoil futures. Speculative net long positions on ICE low sulfur gasoil futures fell 27,612 contracts to 25,984 in the week to July 23, according to ICE data. That means that speculative length fell by over 50% in the latest reporting period. We note this given the remarks we mentioned that had been seen over the weekend suggesting that "Money managers had signaled their negative view of the market in their positioning", when looking at the drop in net length in WTI, Brent ad RB.

Technicals

The energies have fallen to their lowest values in over 6 weeks. Products have momentum that is neutral, while the momentum for WTI on the DC chart is getting near oversold.

WTI spot futures have tested support at 75.21-75.23 with a low today of 75.16. Below that we see support at 73.98-74.06. Resistance lies at 76.32-76.40 and then at 77.22-77.29.

September RB sees support at 2.3470-2.3482 and then at 2.3309. Resistance lies at 2.3858-2.3879 and then at 2.4024-2.4031.

ULSD for September sees support at 2.3722-2.3729, which was tested with a low today of 2.3708. Below this we see support at 2.3407-2.3419. Resistance lies at 2.4109-2.4119 and then at 2.4306-2.4316.

Natural Gas- NG is down 1.6 cents

NG spot futures, now the September contract, fell below $2 today after attempting to rally overnight. Strong supply via Canadian imports and US gas production has weighed on prices the past several sessions. Can very strong power burn due to the forthcoming heat and the recent rise in LNG export feed gas demand turn the market around ? Can spot futures manage a rally after the rather weak expiration seen yesterday in the August contract ?

August NG expired with a "thud", as one analyst said, as the spot futures fell to their lowest value ($1.856) seen since April 26. The next day Henry Hub cash price was valued in the low to mid-$1.80's Monday, thus likely dragging the spot futures into convergence. The spot futures tested the lower bollinger band on the DC chart. The spot futures lost value to the September contract, seeing the front spread widen to as much as an 18.5 cent discount. It settled at 12.9 cents. We wonder if this will cause some spillover weakness in the front spread as September becomes the spot futures?

Meteorologists forecast temperatures across the Lower 48 states will average 83.5 degrees Fahrenheit (28.6 Celsius) on August 1 and 83.9 F on August 2, according to data from LSEG. That would top the current record high average temperature of 83.0 F set on July 20, 2022, thus leading to strong power burn. LSEG forecast power generators would burn about 54.8 BCF/d of gas on August 2, which would top the current all-time high of 54.1 BCF/d reached on July 9 when generators had to burn more gas due to a lack of wind power. But the amount of power generated by wind was on track to rise from 4% last week to around 10% this week, as per Reuters reporting.

But, a cool down later in August is to see power burns fall. Preliminary weather forecasts for first-half August show power burn demand averaging just over 45 BCF/d with single-day highs remaining below 47 BCF/d, as per Platts reporting. With milder weather on the horizon and US gas production ticking up, many analysts have already begun adjusting upward their end-of-season gas storage predictions in another ominous sign for the US market. According to the latest Scudder Publishing Group survey of analysts, domestic inventory should end the injection season at around 3.910 TCF. This is down 8 BCF versus last week's forecast, but is up from a projected 3.836 TCF as recently as late June.

With more heat coming, LSEG forecast average gas demand in the Lower 48, including exports, will rise from 105.6 BCF/d this week to 111.7 BCF/d next week. The estimate for this week's demand is 0.3 BCF/d higher than that seen last Thursday.

As natural gas prices have dropped, coal-to-gas switching has ramped back up with the gas share of fossil fuel consumption now at multi-month highs near 75%, up nearly 5% year-over-year, according to Celsius Energy data.

CME preliminary open interest data from Monday's activity shows a large increase in September call options of 12,494 contracts. Many strikes from $2.10 all the way to $3.00 saw increases. There are several strikes close to one another that saw increases, suggesting call spreads having been initiated.

Technically momentum for the spot NG futures on the DC based chart still shows it as negative, although it looks as if it is about to try to turn upward. This is likely a function of the premium that September carried versus August and the incumbent bounce in spot futures pricing. Yet, September futures today made a fresh contract low for its contract month. Support for the contract lies at 1.913-1.916. Resistance lies at 2.020-2.056 and then at 2.090-2.092. We note that there remains a sizable gap below on the DC chart down to 1.628 that now runs from the low seen yesterday in August at 1.856.

Disclaimer

This article and its contents are provided for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any commodity, futures contract, option contract, or other transaction. Although any statements of fact have been obtained from and are based on sources that the Firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed.

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