Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
Petroleum prices traversed a wide range before settling sharply higher. Early Asian trade saw new highs for WTI before swinging to a low of 92.09 basis March and subsequently bouncing back to a high of 95.82 toward the close. Inventory tightness and Ukrainian tensions continued to support values, with fears of OPEC+ underproduction also in the background. Reports that Ukraine might make concessions to avoid an attack that could entail a commitment not to join NATO and to also take a more neutral political course that does not align itself with Western powers eased concerns following US statements that there was an imminent threat of attack had circulated late Friday and throughout the weekend.
Although forecasts for crude oil prices to reach as high as $120 into summer continue to circulate from major investment firms, comments from the UAE oil minister were noteworthy today. Suhail al-Mazrouei suggested that the tensions between Russia and the West are driving oil prices rather than the kind of fundamental fuel shortage that would justify accelerated output increases from OPEC+. He indicated that the price increases were not the result of supply/demand imbalances but the heightened geopolitical tensions and indicated that monthly production increases have helped to meet growth in oil demand. The comments come on the heels of the IEA report last week suggesting that Saudi Arabia and the UAE have sufficient spare capacity to make up for current shortfalls. Whether any action is taken to make up for current shortfalls in OPEC production won’t be addressed until the OPEC meeting in early March.
An invasion would undoubtedly change the key dynamics for the oil market. How bullish it would be is debatable given the uncertain policy and economic impacts both globally and domestically. In the background are some bearish indicators, with US oil rig counts increasing at their fastest pace in over 4 years. Forecasts suggest that independent E & P capital investment will increase up to 25 percent this year after only increasing 4 percent in 2021. This suggests higher prices are having an impact on US and global investments which will cut into OPEC market share if they continue to sit on the sidelines. In addition, the IEA expects the market to shift to surplus in 2022. The Agency stated that the UAE and Saudi Arabia have capacity to keep the market well supplied. These major producers might be willing to increase production at a faster rate given their strong alliances with the West. In addition, an Iranian agreement cannot be ruled out as Western powers continue to soften their stance due to heightened inflationary pressures. No doubt the Ukrainian impasse remains the primary consideration, but other influences will come into play.
The DOE report is forecast to show crude stocks lower by 1.8 mb, distillate down 1.2 and gasoline up .6 mb. Refinery utilization is expected -.5 to 88.7 percent.
Natural Gas
The market was well supported coming out of the weekend as the March bounced back to end the day over 25 cents higher at 4.195. Initial upside bias was offered by the weather, with the 15 day forecasts adding approximately 23 bcf in demand to the outlook for the second half of the month. Buying was also attributed to a delayed reaction to heightened tensions in the Russia/Ukraine situation that have rallied European gas prices over the last two sessions. Domestically LNG flows recovered to 13 bcf/d over the weekend while production leveled out just below the 95 bcf/d area to offer an overall positive tone. Despite the recovery, forecasts will likely need to continue to trend colder in order to extend the rally beyond the 4.25 area. If that level can be violated the market likely targets the 4.50 area which marks the gap from last Monday as well as a 38 percent retracement of the break since early February. 4.00 now becomes initial support on a pullbacks.
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