The Energy Report Wednesday July 31, 2019
Is this real or is it a game? Oil prices got a boost on a report that Russia and Iran were planning war games in the Strait of Hormuz. A very strange game. The only winning move is not to play. Ok, maybe they called them military drills. This came after the U.S. embassy in Berlin formally asked Germany, France and Britain to participate in a mission to secure the Strait of Hormuz and combat recent Iranian aggression, raising the stakes and the potential for a conflict. Did you ever play tic-tac-toe?
Yet what may actually solidify the oil market bottom may be a very bullish American Petroleum Institute (API) and the fact that our friends at the Fed will go ahead and cut interest rates. This move as the economy is still relatively strong will only boost oil demand.
The big draw in U.S. crude supply really hurts the bearish oil case. The API not only reported a much larger than expected 6.024-million-barrel crude draw but a 1.449-million-barrel draw from Cushing Oklahoma and a big 3.135 million barrel drop in gasoline supply. It’s clear that gasoline demand will heat up as the consumer confidence index jumped to 135.7 in July, an 18-year high, from a revised 124.3 in June, according to the Conference Board. Distillates were in line falling by about 890,000 barrels.
The market gets the Energy Information Administration’s version today, and while it might not be quite as bullish as the API version, it more than likely will show the same trends. Demand will start to exceed previous dour forecasts and U.S. production will fail to live up to expectations.
Then you have the Fed. I think the oil bears are starting to realize it might not be a good idea to fight the Fed. Expectations of Fed cuts are already heating up the stock market and soon oil demand will follow. Don’t get too hung up on the fact that the dollar is higher, despite the Fed cut expectations, there are times like these where both oil and the dollar can flourish. And part of the reason for dollar strength really has been British Pound weakness.
Can natural gas bottom? The chart looks like it may want to try but the fundamentals are still very bearish.
EBW Analytics, on the natural gas, says the natural gas market remains wracked by bearish sentiment as front-month futures fell to a three-year low this week. Speculator net short positions of 178,000 contracts are the most bearish since at least 2010. Fundamentally, the year-over-year surplus is set to rise 41 Bcf over the next three EIA Weekly Storage Reports while the deficit relative to the five-year average narrows.
September could bring a minefield of bearish catalysts for natural gas, including new Permian supplies, meager weather-driven demand, and potential LNG export shut-ins dumping excess supplies to be absorbed by the market. Lackluster forecasts for mild August weather and cheap natural gas fuel costs are likely continue downward pressure on electricity futures in most regions.
Of course, at the same time the chart looks tempting. Wait, General are you listening to a machine?
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The PRICE Futures Group
Senior Market Analyst & Author of The Energy Report
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