This is what a recession might feel like. Oil prices crashed as recession fears overtook concerns about near-term tight supply against a backdrop of reports that China was imposing more testing for COVID. Shanghai launched mass testing for COVID in nine districts. The crash across the commodity complex came quickly after the market seeming started to recover before a massive selling wave came in. That type of selling is inspired by a lack of confidence that the U.S. has a coherent economic or trade plan other than blaming gas station owners for the current prices. Yet, there is no doubt the oil market is sensing some demand destruction at recently elevated price levels. The market still must account for more risk to supply. Some of that risk is again coming from Russia.
Reuters reports that the Caspian Pipeline Consortium (CPC), which takes oil from Kazakhstan to the Black Sea via one of the world’s largest pipelines, has been told by a Russian court to suspend activity for 30 days, although sources said exports were still flowing. CPC, which handles about 1% of global oil, said the ruling to suspend operations related to paperwork on oil spills and said the group, which includes U.S. firms Chevron (NYSE:CVX) and Exxon (NYSE:XOM), had to abide by Tuesday’s court ruling.
This story should help bring the market some support, but the moves in oil are more based on emotions right now than reality.
Reuters is reporting that China is still trying to corner the Russian crude oil market. China is the world’s top importer of crude and June imports of Russian oil — including seaborne shipments and pipeline supplies — are set to total about 2 million barrels per day (bpd), or 15% of China’s crude demand, on par with May’s record volume. This comes as the AP reports that Secretary of State Antony Blinken will see his Chinese counterpart this week at a meeting of foreign ministers from the Group of 20 blocs of nations that will likely exacerbate splits over Russia’s war in Ukraine.
Another factor that the traders will watch today is the Fed Minutes. Part of what’s going on with the oil price crash is concern that the Fed will be too aggressive in raising rates thereby killing oil demand and pushing the economy into a recession.
At the same time, people are concerned about demand destruction because of high prices. Peripheral talk about weaker-than-expected demand over the 4th of July holiday also spurred some of the selling.
Is it possible that consumers have had enough and they’re going to cut back in a significant way? We do know that some people are being forced to cut back there’s absolutely no doubt about that that’s why the American Petroleum Institute report today will be big as we get an indication of how demand is holding up.
A sad note. OPEC Secretary-General Mohammad Barkindo, an oil industry veteran who steered the group through the creation of the OPEC+ alliance, has died in his native Nigeria, according to officials as reported by Bloomberg.
Natural gas is struggling to find a bottom. EBW analytics says that the front month spiralled lower last week as a bearish EIA storage report was followed by a PHMSA report suggesting an extended outage at Freeport LNG. With little physical support, the August contract crumbled. Natural gas is searching for support, and technicals remain indicative of further selling pressure ahead. Although nearing technically oversold conditions, the August contract may continue to probe lower over the next 7-10 days. In the medium term, the potential for returning heat into August, startup of Shell’s ethane cracker, rising coal prices, and bullish shape of the natural gas demand curve collectively favor a mildly bullish tilt to the 30-45 day outlook. With Freeport’s extended 2.0 Bcf/d outage lifting the storage trajectory through winter 2022-23, though, prices may struggle to regain recent heights near term.