Oil prices are standing down after it appears that the drama in Russia after the Wagner Group retreated from its march on Moscow has the market again focused on gloomy economic forecasts and global central bankers that still want a recession. Oil prices slide after ECB President Christine Lagarde warned that interest rates are going to stay elevated as long as necessary. Reuters reported:
“A jet linked to Russian mercenary chief Yevgeny Prigozhin arrived in Belarus from Russia on Tuesday, believed to be carrying him to exile three days after he led an aborted mutiny against the Russian military. Russia’s RIA state news agency reported the authorities had dropped a criminal case against Prigozhin’s Wagner group following the aborted mutiny over the weekend, which challenged the military’s handling of the war in Ukraine.”
Yet the war on inflation is causing the market to look beyond the current fundamentals for oil as they count on a recession to equalize supply. The latest recession call comes from HSBC which predicts that a US recession is coming this year with a recession in Europe to follow, yet correct me if I am wrong but wasn’t it the Fed that paused? Well regardless, more banks are calling for the Fed to get more aggressive. Morgan Stanley’s call is for the Fed to raise interest rates by a 25-basis point hike in July raising the terminal rate to 5.375% versus the 5.1% that they previously had predicted. Speculation that the Fed was done raising rates seems to be off the table for now and instead of taking the leadership role, the US Federal Reserve seems to be following the ECB president Christine Lagarde back into its aggressive interest rate hiking phase.
On the flip side of that, we’re seeing signs that the demand for oil currently is far from recessionary levels. JPMorgan reported the global gasoline demand growth of 365,000 barrels a day year over year and that was driven by strong US gasoline consumption and now with consumption at an 8-week high of 9.4 million barrels a day and predictions that we will see a record-breaking 4th of July holiday, one would expect that those demand numbers could exceed 10 million barrels a day at least for the holiday.
Last week in the US oil demand was at the highest level on a weekly basis since December of 2020 and that should lead to a significant drawdown in U.S. oil inventories this week. Yes, we will see another release from the Strategic Petroleum Reserve and next week most likely that will come to an end. Saudi Arabia will then start their extra 1.0 million barrel-a-day cut. We are also seeing signs that even Russia is getting serious about production cuts or maybe just maintenance. Bloomberg reports that:
“Russia’s seaborne flows to international markets slumped last week but maintenance work, rather than output cuts, is the most likely cause. Crude barrels through Russian ports fell by about 980,000 barrels a day in the week to June 25. Lower shipments were seen from all regions, but the hardest hit was the Baltic, where fewer than half the normal number of tankers were loaded at Primorsk. The port accounted for more than half of the week-on-week drop in the country’s total seaborne crude exports.”
Not that it’s going to matter but there’s a very strong possibility we’re going to see some substantial drawdowns in crude supplies and products starting this week. The Energy Information Administration has made some huge adjustments to their numbers, especially last week but our expectation is based on what we’re seeing on the supply and demand side that we’re going to see those prices start to come down. The market is in a show-me mode right now waiting for the drawdown to happen before they act on it. In the meantime, they’re just going to react to headlines and tough talk from central banks and call predicting a recession.
Hopes for rain is offsetting some of the worst crop ratings in history for this time of year. The USDA said that the soybean condition index score is also the 2nd lowest on record for this week. The 1988 drought had a record-low rating for the week. Reuters reported that the weekly crop progress report from the U.S. Department of Agriculture (USDA) showed that good-to-excellent ratings for corn stood at 50% as of June 25, below the average of 11 estimates given by analysts in a Reuters poll that had predicted 52%. Just 51% of soybeans were in good-to-excellent condition, in line with analyst expectations. The ratings for both corn and soybeans were the lowest for this time of the year since 1988, the year of a historic crop-wasting drought. In the wheat market, the focus is on supplies from the Black Sea region after concerns about political stability in major exporter Russia lifted prices to multi-month highs on Monday. An end to the Black Sea grains deal would hit the Horn of Africa hard, aid officials said on Monday, warning that another hike in food prices would add to the tens of millions of people facing hunger.”
Same game different day for oil. We continue to be locked in a range. It’s the market heads up and appears global central bankers get more aggressive in talking about this risk of inflationary pressures. That causes oil to pull back. The market continues to ignore the upside risks to supply. The market is still focused on the recession. Perhaps tonight the API will break us out of that mode, but we can continue to live hand to mouth from a supply and demand standpoint without any real room for any error. Yes, there is talk about global storage rising and that could be a sign that demand is slowing or it could be a sign that the traders are buying today with the expectation they are going to be able to sell it at a much higher price in a couple of weeks. CME Group (NASDAQ:CME) is expanding WTI Options to include Monday and Wednesday expiries.
Natural gas prices continue to move to the upside. Today we have July natural gas options expiring and that could lead to an explosive move and a market that seems to be shocked that summer can be hot. The market is starting to focus on the fact that we’re going to see some increased LNG exports along with falling production which could set the stage for a major bottom on natural gas.