Crude Falls on Possible Hormuz Arrangement

Oil prices moved lower this week as U.S./Iran negotiations continued, U.S. crude inventories posted a surprise increase, and Iran and Oman reportedly worked toward a possible administrative arrangement governing future passage through the Strait of Hormuz.

Natural gas also moved lower despite warmer weather, with a larger-than-expected storage injection adding to concerns about excess supply.

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Oil

Fundamental Analysis

Crude prices are lower this week overall as U.S./Iran talks muddle along and as a surprise U.S. inventory gain was reported. Iran and Oman are also reported to be working on an administrative deal for the future operation of the Strait of Hormuz.

WTI's high was Tuesday's $82.33/bbl for September, while the low was Wednesday's $74.25. October Brent crude hit its high Tuesday at $86.35/bbl, with the low Wednesday at $78.10. Both grades settled lower on the week. WTI is about $7.00 lower over the last two weeks, while the WTI/Brent spread has widened to $5.30.

U.S./Iran relationships remain strained, leading to pessimism regarding a long-term peace deal. Talks regarding the future operation of the Strait of Hormuz are being conducted between Iran and Oman and indicate a possible "administrative" fee of up to 7% of the value of cargo.

Presently, Iran's proposal would block U.S.- and Israeli-flagged ships from passage. Transits through the Strait of Hormuz were at their lowest levels this week since June, with 33 vessels making passage versus 55 last week. Tanker tracker Kpler identified six crude tankers making the journey this week.

Due to concerns regarding passage through the Strait of Hormuz and now Bab al-Mandeb, Saudi Arabia is considering a new route for crude exports utilizing the Red Sea, Mediterranean Sea and passage around the Cape of Good Hope. This could add as much as $5.00/bbl to the cost of crude delivered to Asia.

Refined-product shortages have also contributed to higher crude prices as Ukraine continues to hit refineries in Russia, a key exporter of diesel and gasoline. Global inventories are shrinking as well. In the U.S., refiners are realizing historically high crack margins while pump prices remain above $4.00/gallon.

U.S. Petroleum Snapshot

The Energy Information Administration's Weekly Petroleum Status Report indicated that commercial crude oil inventories increased 2.5 million barrels to 407 million barrels, approximately 7% below the five-year average.

Gasoline inventories decreased 1.6 million barrels to 210 million barrels and remain 7% below the five-year average. Distillate inventories decreased 3.5 million barrels to 107 million barrels, approximately 12% below the five-year average.

Refinery utilization was 96.5%, compared with 96.6% the previous week.

U.S. crude production remained at 13.8 million barrels per day, compared with 13.3 million barrels per day last year. The U.S. oil and gas rig count was unchanged at 588, compared with 539 last year.

Venezuela averaged more than 1 million barrels per day in June, while estimates suggest restoring production to historical levels could take 10 years and require $100 billion. Meanwhile, OPEC+ members agreed to a final output increase of 188,000 barrels per day for September.

Oil – Technical Analysis

September WTI NYMEX futures are trading below the 8-, 13- and 20-day moving averages. Volume is below the recent average at 155,000 contracts, while the Relative Strength Indicator is neutral at 47.

Oil – Looking Ahead

There is still no clarity on a U.S./Iran peace accord while Iran and Oman discuss the future of the Strait of Hormuz.

The first "greenfield" oil refinery to be built in the U.S. since 1976 was announced this week. The 168,000-barrel-per-day complex will be located in Brownsville, Texas, and designed to process the lighter shale oil that comprises upwards of 70% of U.S. domestic production.

With each passing day, the market also moves closer to the end of peak summer travel season on Labor Day weekend. Refined-product prices, however, should remain elevated until then.

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Natural Gas

Fundamental Analysis

Despite warmer weather, September NYMEX Henry Hub natural gas futures traded lower this week following a larger-than-forecast storage injection, as a supply surplus continues to hang over the market.

The week's high was Monday's $2.80/MMBtu, while the low was Friday's $2.62. The Henry Hub contract has now been in a four-week downtrend.

Natural gas demand this week was estimated at approximately 108 Bcfd, with power consumption below expectations, while supply was estimated at 113 Bcfd.

LNG exports have topped out at 18.1 Bcf, while exports to Mexico were 8.4 Bcfd.

International gas markets remain considerably stronger. U.K. NBP natural gas was most recently at $18.20/MMBtu, Dutch TTF futures were $18.90/MMBtu and Asia's JKM was quoted at $21.15/MMBtu as Asian and European markets compete for the same LNG shipments.

The EIA's Weekly Natural Gas Storage Report indicated an injection of 33 Bcf versus a forecast of 31 Bcf and a five-year average of 23 Bcf.

Total natural gas in storage now stands at 3.117 Tcf, 0.4% below last year but 6.7% above the five-year average.

Natural Gas – Technical Analysis

September NYMEX Henry Hub natural gas futures are trading below the 8-, 13- and 20-day moving averages and have breached the lower Bollinger Band limit.

Volume is approximately in line with the recent average at 105,000 contracts. The RSI is oversold at 35.

Natural Gas – Looking Ahead

The 8–14-day forecast looks favorable for natural gas-fired generation along the southern tier of the U.S., while below-normal temperatures are predicted for the Northeast.

While global LNG prices remain strong, the U.S. is currently exporting at maximum output. Supply surpluses are expected to continue.

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Weekly Oil & Gas Commentary is provided for informational and educational purposes and should not be considered investment, trading or financial advice.