Written Commentary
Price Overview
The petroleum complex traded nervously ahead of the OPEC+ meeting on Monday, where production policy will be reviewed. Unconfirmed reports that producers might be considering upping output along with strength to the dollar helped encourage early selling interest. Support emerged at the lower levels reflecting a widespread belief that there will be no changes to the current output agreement, with production increasing by 400 tb/d in November as planned. With prices now back above 80.00 for Brent, OPEC+ might be more willing to consider revisions, with one source suggesting they could increase output by 800 tb/d in November but reduce it in December to zero.
How OPEC+ reacts to developing tightness in global petroleum markets, exacerbated by growing global shortages of LNG which could shift some generation demand to petroleum-based products, remains to be seen. The tightness is becoming more of a concern, with some talk of an emergency release of the US SPR and continued entreaties to Saudi Arabia urging them to increase supplies and moderate prices. How the cartel responds to these concerns suggests that the meeting on Monday that was looking to be a non-event might bring additional volatility into the crude market.
We see the potential for OPEC sustainable production capacity to be tested in the next six months. Apart from COVID-19 related project delays, the global pivot away from fossil fuels towards greener energy, strains on supply chains, and potential power shortages all appear to be dampening the global oil supply response longer than what it might have been in year past. The possibility that the supply deficit will be 1.5 mb/d in the first half of 2022 will continue to offer support. We still see the 77.00 level basis November as an area of resistance for now and expect pullbacks to the 73.00 area to find good support. Strengthening demand at a time when stocks are declining and production levels look uncertain should underpin the market for the foreseeable future.
Natural Gas
Today’s 45 cent range was the tightest of this volatile week. The market tested the 6-dollar level again overnight before pulling back to end the session 25 cents lower at 5.619. The early support came from the continued strength to overseas values, with new highs being put in almost every day. European and Asian prices are now trading near a US based equivalent above 33 dollars, putting exporters profit margins at exorbitant levels at or above 23 dollars per MMBtu. Buying was also buoyed by reports that the Chinese government had urged its power industry to secure winter supplies “at all costs”. Despite the overnight bump, prices lost momentum into the day session stemming from the improved storage situation in the US. Yesterday’s 88 bcf build and talk circulating that the next few weeks could show builds in the triple digits has eased winter supply concerns. This has been aided by mild temperatures that have crimped demand and could possibly extend the injection season past its normal end. Support on any follow-through weakness still resides near 5.35. With a wide price range traversed multiple times this week, the 6-dollar level looks to have some initial resistance with the highs from 2014 near 6.50 the next target on another spike higher move.
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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