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The Energy Report

Phil Flynn
http://www.pricegroup.com/
pflynn@pricegroup.com


Hammer Time. The Energy Report 07/26/2024

If I had a hammer, I’d hammer in the morning. I’d Hammer in the evening and after oil got hammered it might be time to buy.

Oil prices got caught up in the tech wreck ignoring extremely bullish data. Yet as oil saw some stability in stocks, they put in a classic hammer candlestick formation that is viewed as a bullish. Reversal candlestick pattern that mainly occurs at the bottom of downtrends get those candlestick traders all excited.

Yet the fundamental traders also are seeing things that should be another reason the bears may start running for cover.

John Kemp and Reuters pointed out that, “U.S. crude oil inventories have depleted faster than normal over the last four weeks – squeezing hedge funds running short positions, keeping spot prices firm and the futures curve in a steep backwardation.” Kemp says that, “Commercial crude inventories across the United States depleted by 24 million barrels between June 21 and July 19, according to the Energy Information Administration (EIA). He says that the drawdown in crude stocks this year has been more than twice as fast as the average over the previous ten years.” Kemp points out that, “crude inventories were 8 million barrels (-2% or -0.15 standard deviations) below the seasonal average on July 19. He says that the recent draws more than eliminated a surplus of 6 million barrels (+1% or +0.12 standard deviations) four weeks earlier.

The draws were not a surprise to us, but we did think the draws would have started even sooner. We believe that even with a Chinese slow down, oil demand growth has exceeded production growth, helped along by OPEC plus product restraints.

Yet sometimes demand takes a back seat to macroeconomic concerns. Big pullbacks in the Nasdaq and industrial metals raised concerns about the possibility of a potential recession. Yet the stronger than expected reading on advanced GDP reduced those fears even after a much softer report on durable goods. Barrons reported that, “The U.S. economy powered through the second quarter, growing more than expected even as inflation resumed its path back to the Federal Reserve’s 2% target.

Inflation-adjusted gross domestic product grew at an annualized rate of 2.8% in the second quarter, according to an initial estimate the Bureau of Economic Analysis released Thursday. That was not only a significant rebound from the 1.4% pace logged in the first three months of the year, but it surpassed the 1.9% growth forecast by economists surveyed by FactSet.

MarketWatch reported that Durable-goods orders plummeted in June — but one sector was largely to blame. “The numbers: Orders for durable goods fell 6.6% in June, the Commerce Department said Thursday. It is the sharpest drop since the pandemic. Economists had forecast a 0.3% rise in orders for durable goods in June — products made to last at least three years. It is the first decline in durable goods after four straight gains and was driven by a 20.5% drop in transportation orders.

Nondefense orders plummeted 127%. Excluding the volatile transportation sector, orders were up 0.5%. Core capital goods orders, which exclude volatile sectors like transportation and defense, rose 1% last month after a 0.9% fall in May. And shipments of core capex orders went up 0.1% in June. In the Big picture: Business investment is struggling. Year-over-year, durable orders are down 10.3%. That’s the largest drop since June 2020.

Regardless, we still believe that the market has upside risks. We have been warning about this and the hedge funds are starting to get on board with our market outlook. John Kemp wrote that, “The depletion of crude stocks has been accompanied by an influx of investment money into futures contracts based on U.S. crude prices anticipating a further increase in prices.

Hedge funds and other money managers purchased the equivalent of 79 million barrels of futures and options in the NYMEX and ICE WTI contracts over the four weeks ending on July 16. Purchases were faster than for Brent, where fund managers bought the equivalent of 44 million barrels, according to records filed with regulators and exchanges. In consequence, fund managers had amassed a combined position of 239 million barrels (48th percentile for all weeks since 2013) in WTI compared with only 184 million (33rd percentile) in Brent.

The answer my friend, is not blowing in the wind or sun. Another sad story about the old energy transition. Bloomberg reports that, “French electricity grid limitations will constrain power exports from Monday for more than two months, threatening higher prices in neighboring countries. The curbs that run until October will impact exports to Belgium, Germany, Switzerland and Italy. Similar limitations this spring led to record spreads between France’s day-ahead power price and its neighbors.

France’s fleet of nuclear plants is the backbone of Europe’s power system, often supplying cheap electricity to other nations when renewable assets aren’t generating. Without French exports, they have to fall back on more expensive gas-fired generators.

Italy, which is already struggling as summer heat boosts cooling demand, will be the most exposed to upward price moves. French grid operator RTE said limitations will increase when exports toward its eastern borders exceed 8 gigawatts. There’s a chance that curbs will be needed even before that threshold — which will be updated on Sept. 8 — is reached. Italy is the most vulnerable, then Switzerland, followed by Germany and Belgium, RTE said.

Raising concerns that the golden age of high refining margins is over. Regardless refining merchants are still decent enough to make a pretty good profit the gasoline crack spreads are trying to bottom, and diesel spreads should pick up we have some strong seasonal tendencies for bull spreads in heating oil that kick into gear into the month of August.

High temperatures in August could turn around the natural gas market as well. Yet yesterday’s somewhat bearish weekly natural gas report didn’t really inspire a lot of new buying. Even though the increases were less than the 10-year average, it was higher than expected. The Energy Information Admintation reported that working gas in storage was 3,231 Bcf as of Friday, July 19, 2024, according to EIA estimates. This represents a net increase of 22 Bcf from the previous week. Stocks were 249 Bcf higher than last year at this time and 456 Bcf above the five-year average of 2,775 Bcf. At 3,231 Bcf, total working gas is above the five-year historical range.



There is a substantial risk of loss in trading futures and options.

Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. PFGBEST, its officers and directors may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.

Phil is one of the world's leading energy market analysts, providing individual investors, professional traders and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, investors and media worldwide.

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Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. Alaron Trading Corp. its officers and directors may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.

Contact Phil at 1-888-264-5665 or pflynn@pricegroup.com.