Written Commentary
Price Overview
The petroleum complex traded in a nervous fashion, reflecting uncertainty on OPEC+ oil policy following the extension of the ministerial meeting into the second day. This followed opposition from the UAE to a proposal to extend its supply management policy to the end of 2022. The UAE reportedly blocked a deal agreed to by top producers Saudi Arabia and Russia to ease oil cuts by 2 mb/d by the end of 2021 and extend the remaining cuts to December 2022. Although the UAE did not object to the output cuts, they are demanding that a new deal be inked that acknowledges a higher production level from which cuts can be made. The UAE suggested that it had agreed to a lower baseline figure last year as a gesture of goodwill and on the hope the cuts would end in April 2022 as was agreed. They want to have baseline production set at 3.8 mb/d compared to the current baseline of 3.168 which would allow for a lower actual cut.
Whether current cuts will be maintained will likely be a source of uncertainty as other producers attempt to expand production given higher prices. In addition, questions over the ability of OPEC+ to maintain their production discipline will be a variable even if a consensus is reached given the history associated with these agreements as national interest come into play. Saudi Arabia and Russia will remain the key players, but the potential for other producers to become non-compliant might be a key consideration. With the uncertainty of rising lockdowns and restrictions linked to the Delta variant, we suspect some accommodation will be made to reach an agreement. The level of compliance will be watched closely to see if there is slippage ahead of the expected reentry of Iran into the market later this year.
For now, we see an upside objective toward the 76.90 for prompt WTI crude but recognize that the outcome of the OPEC meeting could have major ramifications given recent developments.
Natural Gas
Yesterday’s higher than expected storage build brought a temporary slowdown to upward price momentum. The 76 bcf build was well above expectations near 67, leading to a test under the 3.60 level basis August after the release. The weakness was offset by an issue on a Columbia Gas Transmission pipeline in West Virginia that cut supplies by an estimated 2 bcf/d. Although temporary, the potential length of the outage is unknown and could lead to further tightness if it drags into next week. Weather reports for the holiday weekend have been revised slightly cooler, but temperatures remain above normal overall in the two week forecasts. Despite the consolidation seen over the last few sessions the market remains overbought, with the RSI well above 80 percent the entire week. the 3.55 area offers initial support, with the 3.49 level likely holding up to any further pullback as it would mark a 50 percent retracement of the rally since June 21st. With the current demand set up, continued warm temperatures, and likely well below normal draw in next weeks report, look for the rally to be reestablished with the 4.00 level the next upside target.
Charts Courtesy of DTN Prophet X, EIA, Reuters
The authors of this piece do currently maintain positions in the commodities mentioned within this report.
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