Written Commentary
Price Overview
The petroleum complex turned cautious today with early follow-through from yesterdays’ strong gains attracting profit taking. Uncertainty over the Omicron variant’s impact on demand persisted as reports that it might lead to less serious illness than the Delta variant was offset by indications that it might be more transmissible. In addition, the strong rally of nearly 15 percent led to speculation that the market might be overbought in the near term.
Underlying support continues to be evident on impressions that indirect US-Iranian talks are facing obstacles as Iran maintains an uncompromising stance despite entreaties from Germany to soften their hardline posture. In addition, tensions between Russia and Western powers remain high and helped raise concern over the availability of natural gas if the Nord Stream project continues to experience delays due to political concerns and heightened aggression from Russia towards Ukraine. Remaining in the background is the firm grip that OPEC+ has on production and their apparent willingness to adjust if necessary.
The less threatening view of the Omicron variant should provide good underlying support on any pullbacks. 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 had little impact on prices, with commercial crude inventories falling marginally by .2 mb while gasoline and distillate rose above expectations by 3.9 and 2.7 mb respectively. Total stocks excluding the SPR rose by 4.2 mb. Refinery utilization continued to improve, rising by 1 percent to 89.8.
The more optimistic outlook for the global economy should limit downside pressures to the 70.00 level notwithstanding unexpected surprises on the Covid front. Some clarity on supply/demand prospects should be forthcoming next week when the OPEC monthly report is released on Monday, followed by the IEA Monthly report on Tuesday.
Natural Gas
The market clawed back some of its recent losses and started to fill the gap from Monday, with the January ending the day at 3.815 for a gain of over 10 cents. For the most part the market lacked fresh news, with volume light on profit taking. Minor cooling in the forecasts offered some scattered support along with a near-term drop in wind generation that should lead to a brief spike in gas demand. Geopolitical issues overseas with the Russia/Ukraine situation also offered underlying support as European prices have rallied sharply over the past few sessions. Despite these developments, the upside move has been feeble at best, with the lows still within striking distance in the absence of a more convincing reversal to the weather pattern. The 3.50 level is a likely target on a return to weakness and should hold up as the market has already reached extremely oversold levels. Without cooler temperatures, filling the gap up to the 4.05 area is likely the extent of a technical bounce. Tomorrow’s storage report is estimated to show a withdrawal of 54 bcf compared to the 5-year average of 55.
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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