Written Commentary
Price Overview
The petroleum complex came under concerted selling pressure due to increasing tension between Russia and Ukraine along with recent disputes between Houthi rebels and the UAE over Yemen. The move took values through last week’s lows to 81.90 basis March WTI. Weakness to outside markets including industrial metals such as copper and equities appeared to reflect the likelihood that the US Federal Reserve will tighten monetary policy to address inflation concerns. How aggressive their actions will be remains a source of speculation and has created nervousness with respect to global economic growth. Concurrent dollar strength has also injected uncertainty over demand trends outside the US if the upward trend in the dollar reasserts itself in response to a tighter monetary policy and raises petroleum prices in domestic currencies.
Today’s move to the downside tends to harden our view that the market was vulnerable despite the heightened geopolitical tensions. Comments from the Saudi Oil minister that demand is approaching pre-Covid levels suggests they might be preparing to open up production, particularly from the Middle East, which corresponds to OPEC’s reticence to allow prices to move much higher given the impact on demand and potential supply expansion outside of the cartel.
The IEA monthly report suggested that much needed relief for tight oil markets is on the way, with forecasts for world supply to overtake demand starting in January, which is also being reflected in valuations. Although we still see the market as being challenged in the first quarter, the potential for the economy to recover strongly in the second half of 2022 should be a supportive influence on any price pullbacks as the switch to renewables and a green economy progresses slower than expected. Subsequently moves into the 78.00 area basis March should see good support.
The DOE report is expected to show crude inventories down .4 mb, distillates lower by 1.3 and gasoline up 2.4 mb. Refinery utilization is expected to be lower by .6 percent.
Natural Gas
With geopolitical tensions between Russia and the Ukraine ramping up over the weekend, European gas prices spiked higher and offered spillover support to US values as the March contract gained just over 9 cents to end the session at 3.875. The positive tone was supported by current cold US temperatures, which have increased demand and precipitated well freeze-offs across multiple producing regions, restricting overall output for much of January. As evidenced by the issues with Russia, US LNG flows remain a supportive underlying influence and are likely to remain at full capacity for the foreseeable future. The main limiting factor continues to be weather, as the expectations for early February have trended warmer over the past week and caused trade to extract almost all winter risk premium despite prevailing near term cold. Without some signs of a trend toward cooling in the February forecasts, the market will likely have difficulty violating the 4.00 level on the upside. Initial support should surface near 3.70.
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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