Benchmark crude futures retreat on bearish factors

OILOil

Benchmark crude futures retreated last week, with WTI recording its fifth straight weekly decline, and both the benchmarks falling in the month of July by more than 6%. Bearish factors largely outweighed supportive factors, with US crude stocks rising unexpectedly in the week ending July 27 by 3.8mn barrels.

Moreover, Opec and Russia raised output in July reaching respectively 32.6 and 11.2mn bpd. In the US, a China trade dispute is escalating as China cut its US oil imports and is expected to retaliate to US tariffs on its goods by imposing tariffs on US LNG and oil, which ultimately will weigh on global demand. However, price losses were capped by the relatively low levels of crude stocks in the US and expectations that they will soon decline again. Whereas, Iranian oil production already declined by 0.15 mbpd since its May level of around 3.8 mbpd. The US oil rig count declined by two last week, but it is still higher by almost 100 than the same period of last year.

Since the end of last year, oil prices are fluctuating between $60 and $80. The floor price of $60 is supported by a current low level of stocks, especially in the US, while the ceiling price of $80 is more indicative of the demand response. Therefore, oil prices are seen currently as rangebound, trapped between supply concerns that may aggravate or ease the supply-demand imbalance and worries that trade disputes would escalate to trade war and undermine global economic growth and global oil demand. Saudi Arabia, Kuwait and the UAE are expected to increase their price cuts for the month of September, which will add more crude to the market in the coming weeks.

Gas

Asian spot LNG prices continued to rally for a second week, gaining another 2.6% w-o-w. Temperatures in Japan reached record highs, while in China and South Korea they will continue to be above average for the coming 15 days. The heatwave in Japan triggered higher cooling demand and the highest power prices on record, which forced the use of maximum capacity at fossil fuel power plants. LNG purchase tenders look firm until next October in Japan, South Korea, India and Mexico, but incoming supplies from new commissioned trains in Russian Yamal LNG and Australian Ichthys LNG projects would cap any price increase.

As above-average temperatures are set to continue for the coming weeks in East Asia and Europe, LNG demand might continue to strengthen depending on the duration of the hot weather period.In the US, Henry Hub natural gas futures rose by around 1%, which makes it the third straight weekly gain. Gas in storage is 20% below the five-year average, and for this period of the year it is at its lowest level in the last 15 years. The forecasts of hot weather over the next two weeks are expected to keep gas stores low. In the UK, gas futures rose by 2.6% last week due to outages and higher demand resulting from low wind generation forecasts this week.

Sources and photo-credits: Gulf Times