Written Commentary
Price Overview
The petroleum complex continues to attract buying interest on breaks, with 70.00 basis January crude setting up as a key support level. The underlying support is linked to a variety of factors that include the belief that the rising incidence of Covid infections will not necessitate a return to lockdowns or significantly deter the global economic recovery. In addition, the rising recognition that the OPEC decision to maintain an increase in output cuts of 400 tb/d last week was a stabilizer to the market given that the eventual rebuilding of inventories can proceed at a measured pace to achieve a balanced market in 2022.
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. Tensions between Russia and Western powers remain high and have 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. Offsetting these considerations are uncertain growth prospects in China, where energy supply shortages have eased, and inflationary pressures have stabilized for now.
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. Recent weather patterns and above normal temperatures have temporarily eased some of these concerns.
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
Prices traded sideways yesterday with an inside day on the charts before clawing out some gains late in the session today. The January contract settled higher by 11 cents at 3.925. Underlying support came from record LNG flows near 12 bcf/d, strength to overseas prices and some cooling developing into the back half of the 15 day forecasts. Yesterday’s storage report showed a 59 bcf draw, which was above estimates but only garnered temporary support after its release. The creep higher has been labored, and today’s gains were achieved on light volume with the market still unable to fill Monday’s gap. With the lows still within striking distance and a flagging chart pattern, the path of least resistance still appears down until a colder weather pattern materializes. The 3.50 level looks like the next target on a return to weakness, with the 4.05 area the likely extent of a technical bounce near term.
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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