Written Commentary
Price Overview
The petroleum complex attracted buying interest on impressions that indirect US-Iranian talks that began last week were facing obstacles as Iran maintained an uncompromising stance that the US should lift all sanctions imposed since the US left the deal under the Trump administration. They continue to argue that the US and Western allies should also offer them guarantees that no new sanctions would be imposed in the future. The negotiators for the Western powers continue to take the stand that Iran should return to the original deal as their base line and that lifting of any additional sanctions would necessitate the adoption of additional restrictions on their nuclear programs. The hard line by both sides with little attempt at compromise suggests that negotiations will be drawn out.
An additional source of support was sentiment suggesting that the Omicron variant might be less aggressive and have less serious effects than Delta, which could have broad implications for any new lock-down and travel issues. If true, the lower price levels established last week were overdone and demand could be understated. The appearance that OPEC+ might not be concerned about demand was apparent by the increase in January Official Selling Prices by Saudi Arabia for all crude grades sold to Asia and the United States by up to 80 cents over Dubai. The decision comes on the heels of the cartel’s agreement last week to maintain their 400 tb/d production increases even though some producers have been unable to reach the higher output levels. In addition, the appearance that OPEC+ is firmly in control of production policy and willing to adjust if necessary supported prices.
Today’s recovery in values and a less threatening view of the Omicron variant could provide the basis for a move to the 72.00 area basis January and potentially back up to the 75.00 level. Low stocks continue to be a focus and the shift to petroleum derivatives as an alternative to scarce natural gas supplies in Europe and Asia during the Northern Hemisphere winter remains a distinct possibility and supportive to demand trends.
The DOE report is expected to show crude inventories in the US falling by 1.9 mb, as increased refinery utilization rebuilds product stocks with gasoline rising by 1.6 and distillate increasing by 2.1 mb. Refinery utilization is estimated to be up .4 at 89.2 percent.
Natural Gas
Downside momentum returned to the market today as the January contract gapped lower overnight and crashed through the 4.00 level to reach an intraday bottom at 3.63. Selling pressure showed little sign of letting up as the session wore on, with the settlement coming in 47 1/2 cents lower at 3.657. Weather forecasts, which had cooled on Friday, flipped back to the moderating trend as the 15 day runs decreased demand by approximately 50 bcf. The mild start to the winter has quickly extracted risk premium as speculation that storage could catch up to the 5-year average in the coming weeks nears fruition and fears of low stocks to end winter abate. Strong LNG exports and high overseas prices appear unable to rally this market, as the weather has taken firm control. The 3.50 level looks to be the downside target and could offer the best chance of slowing the slide as the market has already reached extremely oversold levels with a large amount of winter still to go. Without a decidedly bullish swing in weather, filling the gap up to the 4.05 area may be the most we can hope for out of any near-term recovery.
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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