[ihc-hide-content ihc_mb_type="show" ihc_mb_who="10,13,14,16,18,19" ihc_mb_template="1"] By Mark Rossano Activity will start to see pick-up this week with a steady trend higher into month-end as E&Ps prepare for a Q3 push. All three streams (crude, natural gas, liquids) all remain supportive of an increase in completions as we head into a period that is normally seasonally strong. The conversations remain around labor and underlying costs, but many drilling and completion programs are being agreed upon that will provide the next leg higher. Natural gas is finding additional support withunplanned maintenance cutting flow from the Marcellus and strong LNG support. The shift higher in coal prices globally is providing a strong backdrop to maximize LNG runs- especially in Asia. This will keep our utilizations elevated, and another round of heat waves keeping storage levels muted. The NGL backdrop also remains very supportive of completions with the whole basket remaining well bid- especially ethane staying strong. U.S. crude pricing remains robust with LLS vs Brent at a $.30 discount and WTI getting more expensive against Dubai reducing net exports from the U.S. Under the current pricing metric, U.S. exports will slow down, and imports will rise into key regions- especially PADD 3 and 1. Cushing has seen draws flatline as small builds increase, which will remain the case as exports cool off, U.S. production trends higher, and imports accelerate. The import side will pick-up as PADD3 has maxed out the top of the stack aka gasoline, blending stocks, and aromatics. In order to increase runs, refiners will have to import more heavy crude, which can enable a little bit more of gasoline production (4% from the current 64% yield) and the ability for some recracking of fuel oil or residual. The shift in flows will lift imports and cut exports that will result in crude starting to build as the imports are forced to increase. The U.S. product backdrop had a perfect storm of surging imports and increasing refinery runs to take advantage of the spread. Now we had demand normalize and a surge of imports/runs sending storage back to the highs. We will see demand pick back up (not to 2019) as summer driving season remains in place and pulls some of the additional gasoline through the system. The problem is between imports remaining elevated as well as runs- builds will be the mainstay in gasoline. We will also see a pickup in distillate yields as refiners run heavier crudes, which will be a requirement if they target something closer to normal run rates. The physical market remains an unbalanced market with spreads falling in Europe and West Africa while Russian cargoes find some steady buying activity. West Africa- more importantly Nigeria- has started to see some tenders for July loadings, but it still remains well off pace as Angola releases their loading schedule for August next week. India has started putting in tenders for Aug/Sept delivery still off normal pace, but at least seeing some progression of cargoes. Nigeria is still sitting on deferrals from April, and so far the pace won’t be enough to help balance out their market. Angola is seeing their discounts grow as spot cargoes struggle to clear and 12 shipments still remain in their July program- which was already the lowest in 13 years. More than 10 out of 32 Angolan cargoes for July have yet to find buyers while more than half of 49 Nigerian cargoes also unsold: traders in the marketDemand from China, especially teapot refineries, remains muted, they saidTeapots are still waiting for release of second batch of import quotas China remains the unknown as the CCP maintains their investigation into the independent refiners for breaking their quotas and “cheating.” This will create fines and sanctions that limit their buying power. While the investigation is ongoing, import levies go into effect next week that will increase the cost of some of their key blending stocks. This will also cause a cut in runs or at least keep activity muted at these levels of operation. China Crude Imports Inflation issues remain throughout the system with a new surge in the U.S., and more importantly, fresh increases at the front end of our supply chain- IE China. The data in the U.S. surprised to the upside with prices driving higher throughout the system. The next leg of inflationary pressures within the U.S. will be from housing and underlying consumer goods. We have already felt a large part of the “base effect”, and the MoM and rolling 3 months remains a better gauge for where we are on the inflationary cycle. If you want top look at it differently, we have no surpassed the “trend” on inflation from pre-Covid levels with the momentum building taking us higher. China saw another big surge in PPI, which will show up on the front end of our pricing metrics. It is also a key reason we have seen small businesses say they will be raising prices over the next three months at the highest level ever. We have been all over the grain story since late 2019 as we saw emerging issues on global yields. COVID19 just threw jet fuel on that forest fire, and now we have renewed issues with droughts cutting yield from LatAm. We also saw some bullish pricing data points out of WASDE following heavy rains in the Lower Mississippi Valley impacting 1% of corn, 2% SRW Wheat, 4% of soybeans, 7% cotton, and ¼ of U.S. rice. These are growing issues as we face tightness in the system that we have not had in 25 years. This is going to make things all the worse as Brazil faces pressure on logistics and general crop yields. The trend remains higher in the U.S. for inflation: While we have additional pressure in wages (especially real wages), keeping pressure throughout the complex and more importantly on spending. Jobs remain plentiful, but many of them are remaining unfilled. There is a lot to potentially unpack within that because we are seeing a big drop in “real” wages and a slow down in people searching for jobs. It is a mixture of People receiving benefits but are starting to expire- yet people haven’t adjusted.Day trading activity has picked up, and they prefer to keep trading.Wages are too low, and they are waiting for a better offer.Skills don’t match with the job and would require a lower benefits package.Maybe capacity utilization and underlying participation rates is way off. More on this in our bigger report next week! [/ihc-hide-content]