Written Commentary
Price Overview
The crude oil continues to find support near the 75.00 area basis January, reaching a low of 74.76 on Sundays open. The early pressure was linked to the rise in Covid cases in Europe and the associated lockdown potential, along with the likelihood of a coordinated release of Strategic Oil Reserves by China, the US and other OECD countries. Japan also reported that it was considering a request by the US to release strategic reserves. Nevertheless, fresh buying interest developed at the lower levels on ideas that the release of 100 mb, or about 1 day of demand, was unlikely to ease the pressure on prices, particularly if OPEC+ sees the move as a threat to their current control on the market. Additional support to values was traced to reports of drone attacks by Houthi rebels this weekend on Aramco refineries in Jeddah, and to Saudi media reports of an imminent threat to shipping in the Red Sea.
The push for a coordinated release of oil stockpiles by the Biden Administration is a warning to OPEC+ to heed pleas from the US and other consumers to increase production and cool petroleum prices, which in turn could ease inflationary pressures that are building in major oil importers such as China, Japan, Korea, and India. The effectiveness of emergency reserve releases is in question due to the likely limited short-term impact. Nevertheless, it is a counter to OPEC+ power, as they appear intent on maintaining their control over the oil market and supporting higher prices. In addition, the long-term impact is questionable given the effect on capital investment in E&P, which appeared to have turned positive due to the higher prices for 2022.
The market is in a delicate balance, with declining inventory levels offset by concerns over rising Covid infection rates and demand prospects. 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, which will be tested at their meeting on December 2nd. Today’s retest of the 75.00 area basis Jan sets this up as a key area. A penetration of this level might pressure values down toward the 71.00 area before better support emerges, while resistance likely arises near the 82.00-83.00 range until a more concise reading of demand and OPEC determination on prices is received along with the scope of progress at the Iranian negotiations on a new nuclear agreement that resume on November 29th in Vienna.
The DOE report on Wednesday might also have an impact with current estimates indicating crude stocks falling 1.0 mb, distillates down .7 and gasoline lower by .2, with refinery utilization gaining .7 to 88.6 percent.
Natural Gas
The trading week kicked off with sharp losses as the January contract settled 28 cents lower at 4.861. Selling started overnight with weakness spilling over from overseas markets and picked up steam in the morning as weather models confirmed a significant moderation in temperatures expected into early December. The recent strong performance from wind generation has added to demand destruction, with production also a negative influence as it has held above 96 bcf for the last 4 days. Underlying support continues to be offered by LNG flows, which have settled in near 12 bcf/d. Despite bouncing well off the lows, the market still settled below the 100-day moving average near 4.92. This could lead to a further probe to the downside, with 4.70 and 4.57 as support levels. Initial resistance is likely to surface in the 5.05 area and then from the trendline off the late October/early November highs in the 5.18-5.20 range. Early estimates for this week’s storage report, which will be released on Wednesday due to the Thanksgiving holiday, are for a 21 bcf draw, with the 5-year average at 44.
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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