Written Commentary
Price Overview
The petroleum complex attracted good selling pressure with values declining in early trade to a low of 79.30 basis December before attracting support late in the session and moving back above 80.00 to close near unchanged levels. The weakness appeared to be linked to fears that an uptick in Covid infections might derail the recovery, along with continued dollar strength and pressure to release oil from the SPR. In the background was OPEC’s Monthly Report released last week that showed a downward revision in demand for the fourth quarter, reflecting an anticipated slowing in the Chinese and Indian economies along with the effects of higher prices. The restart of Iranian negotiations at the end of this month also limited buying.
The early pressure on values developed despite news that Chinese refinery output rebounded in October from the lowest level in over a year, with processing volumes at 13.75 mb up from a 16-month low of 13.64 in September. High gasoline and diesel prices have encouraged many state oil refiners to run at full output while independent refiners have also increased utilization rates to 73 percent in October from 68 percent in September despite tighter allocations.
The late recovery suggests that the market has good underlying support. As we have suggested, we see the market in a delicate balance with declining inventory levels in key consuming countries offset by concerns over a rising interest rate environment and the possibility that it will constrain growth. Uncertainty regarding releases from the SPR along with the restart of Iranian nuclear negotiations will be counterbalanced by the strong control OPEC+ has over production policy. Prices are generally weaker during the first quarter but given the sizable backwardation this might be discounted. We continue to believe that pressure on values much below 80.00 should be limited while resistance likely arises near the 85.00 level until a more concise reading of demand is received. The IEA will be releasing their monthly report tomorrow and it will be watched closely for their take on the demand and inventory situations along with compliance levels of OPEC.
Natural Gas
Prices managed to put in a new low for the move in the early hours this morning before finding steady buying interest the remainder of the session to settle nearly 23 cents higher at 5.017 basis December. Selling was linked to solid production numbers over the weekend above 96 bcf/d and continued unplanned maintenance issues at Freeport LNG that dropped total flows below 11 bcf again today. The steady recovery in prices was spurred by increased demand expectations due to cooler revisions to the 15 day outlook along with the continued recovery in overseas LNG prices. European levels were higher as there continued to be no sign of increased flows from Russia to start off the week while the threats from Belarus regarding the cut-off of supplies via the Yamal Pipeline remained a concern. The recovery today was impressive as prices flirted with the 100 day moving average over the past few sessions but have managed to separate from it for now. The market likely needs cooler temperatures to materializein order to maintian upside momentum. Early estimates for this weeks storage number are pointing to an injection near 24 bcf verses a 5 year average draw of 12, which will not aid the cause near term. The 100 day moving average near 4.78 is a key level to watch as a settlement below there could lead to further losses. Initial resistance looks to be near 5.16 and above there at 5.30 which marks a 50 percent retracement of the break since early November.
The authors of this piece do not currently maintain positions in the commodities mentioned within this report.
Charts Courtesy of DTN Prophet X, EIA, Reuters
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