Written Commentary
Price Overview
The petroleum complex continued to attract good buying interest amid challenges on both the supply and demand side. The ongoing decline in inventory levels in the face of a further expansion in demand and restraint on the supply side is upping concerns over the adequacy of supplies ahead of winter. Goldman Sachs raised its forecast for Brent crude by 10 dollars to 90.00 by the end of this year in response to the belief that a recovery in demand after the outbreak of the Delta variant will be faster than previously thought, and on the curtailment of US production due to Hurricane Ida. Despite the tight situation, OPEC+ has had difficulty expanding output due to under-investment, maintenance delays, supply chain issues and labor challenges. Fear that the surge in natural gas prices on international markets will favorably impact demand for petroleum as an alternative is also exacerbating concern over the adequacy of supplies.
The appearance that OPEC+ is unlikely to change policy at their meeting on October 4th despite signs of developing tightness will likely continue to underpin values given that some producers are having difficulty reaching their output targets, particularly in Africa. In addition, the Iranian negotiations to lift sanctions appear to have stalled, suggesting no near-term supply relief, which will keep control of the market in the hands of the Saudis and Russia. We still see the 77.00 level basis November as a viable objective near term and expect pullbacks to the 73.00 area to find good support. Strengthening demand at a time when stocks are declining and production levels are uncertain should underpin the market for the foreseeable future. With reports of power shortages and credit liquidity issues, the Chinese economy has the potential to eventually become a drag on growth, the rebound in India’s demand might moderate any reaction.
Natural Gas
The market opened moderately higher overnight and never looked back as the November contract ended the session at 5.731 for a gain of 53 cents. Today’s action marked a new contract high as well as the highest settlement price by over 20 cents. The strength spilled over from a sharp rally in overseas prices as panic seems to be spreading regarding shortages into the winter demand season. Reports that China is becoming an aggressive buyer of LNG added to the fears as Europe will need to compete for those cargos to replenish depleted storage levels. US export levels have picked up recently, nearing 11 bcf over the weekend but have yet to bump up against full capacity as scheduled maintenance has slowed some facilities. Weather has not been a contributor to the rally as morning revisions dropped CDD expectations substantially and the shoulder season is moving in with few surprises. With fund short positions still substantial, a near term extension of the rally is possible. Chart resistance does not surface until the 6.50 area, while initial support likely surfaces near 5.50.
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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