Daily Oil Fundamentals

Oil is Slightly Supressed and Sidelined

Hurricane Beryl has not only dumped water on all in its path, but it has also quenched some of the bullish fervour that was slowly developing within the oil fraternity. The Port of Houston, pipelines and other associated infrastructure have been taken offline, but the market reaction is curiously muted. Encircling itself with questions on what ought to be bullish, as in products or crude, assessment is then made of the current demand situation which while changeable depending on what weekly inventory reports reveal, seems quietened even with the Fourth of July weekend. GasBuddy's 18-month US Gasoline average retail price differs little to those of previous readings. If there is enough Gasoline around at the moment, then why worry if refiners might shut in for a day or so, or if Crude deliveries suffer a similar timeline in delay? 

With the expected political shock in France unrealised, a possible diplomacy sympathetic elected in Iran and another teasing of a breakthrough in ceasefire talks for Gaza, oil prices unwind anxiety. Whether or not Ukraine's threat of retribution, after the horrifying Russian missile attack on Kyiv's Okhmatdyt children's hospital, sees fruition and how only time will tell. Fast money has other destinations to land and whatever Jerome Powell offers in the next few days as he addresses panels of the US Government will be felt in the ticker tape of stock markets rather than oil prices. With the S&P, Nasdaq and Nikkei making record highs again, spurred by the ever-bulls to AI and technology, any sort of hint in dovishness will continue to be expressed in equities to a much greater degree than in oil. Our market will find a sympathetic bid if Powell's comments are indeed friendly to a rate cut and if the US CPI backs such language with a lower reading. Apart from the EIA Short-Term Energy Outlook today, we will be an extra in this financial production, following how the main cast develop the plot.

Natural Gas is always worth watching

Casting our glance back to the early part of this year and the demise of Heating Oil, where counter to the Gaza inspired rally in WTI, the distillate contract went about a serious and series of runoffs in prices. M1 Heating Oil notched the year’s high of 297.35c/gal in February and proceeded to fall for 4-consecutive months before making a yearly low in early June of 225.66. Reflecting the move, the Heating Oil/WTI crack travelled from $48.12 to $22.05/barrel. Coming at a time of seasonal sensitivity, the move down on Heating Oil can arguably be blamed for much of the reason why the oil complex embarked on a slump, which was only held at bay by the continuing fear in and around the complexities of Gaza and Israel. Therefore, without Heating Oil maintaining its recent rise from the canvas after such a knockdown into the back end of the year, where its importance will grow and grow, rallies in outperforming crudes will not be perpetuated.

What initially holed the good ship Heating Oil was a torpedo, shaped in the form of a very soft Natural Gas market. The copious drilling in the Permian Basin and such places would leave a byproduct of excess Gas, leading to M1 Henry Hub falling dramatically from the high of the year in January of $3.392 to $1.482 MMBtu at the end of March. With the mild global winter and industrial demand slackened, the idea of any need for Heating Oil in any variety being used as a ‘burner’ evaporated and the ensuing fall from grace of distillate has been consistently painful for those that hold onto ideas of increasing refinery margin and therefore runs.

However, there now appears to be something of sea-change happening in the Gas market, well at least in longer term narrative. Prices have retreated in the last fortnight somewhat since once again breaching $3 MMBtu, US Gas stocks at the end of June were nearly 20% higher than their 5-year seasonal average amid cooling weather and a drift in demand due to the US holiday. But bulls are toying with increased length as expected very high temperatures in the United States this summer will see power stations having to work very hard in order to keep up with cooling infrastructure requirements. S&P Global observes, that through at least mid-July, many market analysts expect the US gas storage surplus will continue narrowing as exceptionally hot summer weather persists across much of the US Lower 48 states. The EIA reports that Gas consumption arising from power generation is already 14% higher than that of the same period a year ago.

Gas prices have been more influential in Europe due to the continent needing to wean itself off cheap Russian supplies. Having gone about securing other sources, and in the main LNG, Europe also found itself on the back end of a mild winter and in some cases more Gas than it knew what to do with. But there is a school of thought that with a change in the mix of how power is generated then Gas demand is set to show something of a revival. Further coal-fired power stations are set to be retired on the continent and Bloomberg Intelligence expect the short-fall to be at least initially covered by those that use Gas. After falling in 2023 to the lowest in eight years, the prospectus sees demand in 2024, 2025 and 2026 being respectively 394, 412 and 426 billion cubic metres per year before holding steady to tailing off into 2030. Also creating demand is the requirement by the European Commission that storage must be at 90% until the end of 2025.

Relying on scenarios involving weather in the US and a flaky Europe, hell-bent on getting rid of any sort of fossil fuels for power generation is rather tenuous. Linking the two is also a little ambitious bearing in mind the completely different mindset around energy generation. However, at present these two might just ride a tandem to give a fillip to a distillate market that has been bereft of friends for most of this year. Heating Oil, and Natural Gas for that matter, will probably need evidence of economic activity from a flailing China. However, with an upswing in the ability of hydroelectric generation, even if the currently sleeping Asia dragon needs more electricity it is probably covered. As with most demand stories in the oil complex, each will have to be treated as ephemeral because of the incredible ability of this world to turn events on their heads. Natural Gas and its associates will not be the main cause for a turn in the fortunes of Heating Oil and thus the wider complex, but it can be added on as either a wingman or an ejector seat that accelerates a confluence in proceedings.

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09 Jul 2024