Written Commentary
Price Overview
The petroleum complex recovered from the sharp losses seen on Friday, with renewed buying interest attracted by ideas that concern over the Omicron variant was overdone, along with mounting caution ahead of the OPEC meeting. Some uncertainty regarding OPEC+ deliberations was indicated by the postponement of the technical meeting until Wednesday as staff focused on the implications of the new variant on demand, with the Ministerial meeting pushed back to Thursday. Although both the Saudi and Russian Energy Ministers expressed a belief that the variant was unlikely to prompt urgent action, a more important consideration might be how they respond to the US action to release 50 mb of Strategic Reserves in conjunction with other consuming countries. Whether OPEC+ sees it as a threat to their hold on pricing and they tweak the current agreement to gradually raise production levels by 400 tb/d remains to be seen. Another factor to consider is the start of negotiations to lift export sanctions on Iran and if the main participants, including the US, will be more amenable to an agreement to free up Iranian oil for export to the global market.
The recognition that spare capacity is limited to mainly Saudi Arabia, UAE and Iraq, and that OPEC+ is having difficulty hitting goals of 700 tb/d during September and October is problematic for the market if the global economy continues to grow. Rising infection rates associated with the Delta variant, concerns about the new strain, and their impact on economic growth and travel will be key issues driving valuations into the first quarter. The pace of substitution of petroleum derivatives might contract if economic slowing eases supply shortages of competing fuels.
The DOE report is expected to show crude inventories drawn down by 1.7 mb while gasoline is expected to increase 1.3 and distillate are estimated to gain 1.8 mb. Refinery utilization is estimated to rise by .8 to 89.4 percent, keeping pressure on refining margins. From a price standpoint it looks like 66.00 basis January is a key support level from early September, while resistance rests near the 75.00 area which had been support before Friday’s sharp break.
Natural Gas
After Friday saw prices rally sharply into the December expiration on low post-holiday volume, all gains were given back today with the January contract settling over 62 cents lower at 4.854. The main catalyst out of the weekend was bearish weather revisions that removed as much as 45 bcf of potential demand from the 15-day forecasts. Adding pressure was record production levels, which hit 98 bcf/d over the weekend. Exports remain strong, but with minimal capacity increases set for the near future they are no competition for mild temperatures and spiking production. With the poor close and settlement well through the 100-day moving average, the chance of a further washout has increased with an extremely mild forecast into the end of the week. The 4.65 level looks like initial support, with 4.50 in reach if momentum continues to build. Any recovery will find the 100-day moving average near 4.98 as initial resistance.
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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