Trade Awaits US Inventory Reports

CRUDE OIL

August Crude Oil was lower overnight following yesterday’s rally, as traders were awaiting the weekly US inventory reports today and tomorrow, as well as the US PCE report, a key inflation indicator, on Friday. Geopolitical risks (wars in Ukraine and Middle East) are supporting the market, as are expectations for strong US gasoline demand this summer. A Reuters poll is calling for a 3 million-barrel draw in US crude inventories this week, with gasoline supply expected to be down 1.1 million and distillates up 400,000. Refinery runs are expected to be steady at 93.5%. At 457.1 million barrels, US crude stocks are close year ago and five year average levels. The Commitments of Traders Report showed managed money traders were net sellers of 2,070 contracts of crude oil for the week ending June 18, reducing their net long to 190,665. This is toward the middle of the historic range and does not present a burdensome position. San Francisco Fed President Mary Daly said inflation is not “the only risk,” that policy must exhibit care, and that the bumpiness of inflation data so far this year has not inspired confidence. Fed Governor Michelle Bowman said that holding rates steady for some time will likely be enough to bring inflation under control. A higher than expected PCE number could spark ideas the Fed will postpone rate cuts further, which could  lower demand expectations.

PRODUCT MARKETS

August RBOB is seeing some consolidation ahead of the weekly EIA inventory reports. Last week’s EIA report showed an as-expected decline in gasoline stocks and an improvement in implied gasoline demand. The market is anticipating another 1.1 million barrel decline this week and would probably appreciate another strong showing on the implied demand front after last week’s 9.386 million barrels per day. The Commitments of Traders Report showed managed money traders were net sellers of 6,352 contracts of RBOB for the week ending June 18, reducing their net long to 20,172. This was their smallest net long since July 23. Funds have been net sellers all but one week since the position peaked in April, and the resumption of the selling last week shows they are positioning against the recent rally. The trade is looking for a 400,000-barrel increase in US distillate stocks after last week’s surprise 1.7 million-barrel decline. Stocks are 7.3 million barrels above a year ago but 10.9 million below the five-year average. The COT reports showed managed money traders were net buyers of 4,276 contracts, reducing their net short to 5,167. This is far from oversold, and the buying trend is supportive.

NATURAL GAS

Natural gas prices were higher in Europe overnight as traders expected stronger demand in Asia to bring competition for LNG supplies.  ING is estimating that Asian LNG imports for January-May were up 10% from a year ago, with the increase driven largely by China. However there are also concerns that in doing so China has built up its storage levels to near capacity levels. ln the US, forecasts are calling for more moderate temperatures in the northern part of the nation but an extended heatwave in the south, which could keep the strong consumption-theme alive. This week’s EIA report natural gas storage is expected to show a net injection of 32-55 bcf for the week ending June 21. At 3,045 bcf in last week’s report, storage was up from 2,702 a year ago and above the five-year average at 2,484. It was also above the previous five-year high of 2,926, which suggests there is plenty of cushion against extended heat waves. The Commitments of Traders Report showed managed money traders were net sellers of 2,342 contracts of natural gas for the week ending June 18, reducing their net long to 38,642. This is close to a neutral position. There was a report yesterday that rising US labor costs threaten to derail new LNG projects, which could lower US export capabilities.

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