Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
Values dropped through Monday’s low at 115.54 basis April following reports the UAE’s Ambassador to Washington had indicated that they “favor production increases and will be encouraging OPEC to consider higher production levels”. The news was a surprise and came on the heels of an S&P Platt’s survey indicating that OPEC had managed to lift its production by 560 tb/d in February. Whether they are willing to forego their alliance with Russia in OPEC+ remains a key question.
Prior to the collapse under yesterday’s lows, weakness reflected disappointment over the paucity of price gains following news yesterday that the US was banning Russian imports, reports that Britain would also phase them out, European Union plans to cut reliance on Russian gas by two thirds this year, and with vague talk that Russia might be willing to soften their position on Ukraine. The recognition that Russian imports only account for 3 percent of the US total also appeared to temper strong bullish sentiment.
For now the market has priced in the disruption to Russian supply from sanctions, as lines of credit and investment support have largely been effective at stopping their exports and additional sales of crude. The market is also hopeful that some sort of accommodation toward lifting sanctions can be made with Iran and Venezuela and allow additional supplies into the market.
Although it is not currently enough to replace Russian wet barrels, the talk of additional supply appears to be undercutting bullish sentiment. Another consideration might be the stance of both the UAE and Saudi Arabia toward lifting output levels given the prospect that longer term harm to the market from demand destruction and a quicker transition to renewables could far outweigh short term benefits of allegiance to Russia and the OPEC agreement. The addition of supply by the UAE and Saudi Arabia would undoubtedly change the dynamics of the market and work as a strong deterrent to Russia in advancing their goals in Ukraine. Nevertheless short term supply concerns will persist until stocks show signs of rebuilding.
Of concern but still generally ignored was the DOE report. Commercial crude stocks continue to fall, this week by 1.9 mb, while gasoline and distillate declined by 1.4 and 5.2 respectively. Stocks at Cushing remain tight, falling by .6 to 22.2. Total petroleum stocks including products fell by 8.1 mb. Usage remains robust, reaching 21.2 mb compared to 20.8 last week and 21.6 last year.
Natural Gas
The market continued to retrench over the last two sessions in the wake of moderating weather forecasts in the US. The April contract traded down to a low at 4.45 today before recovering to settle near unchanged levcls at 4.526. The release of the EIA’s Short Term Energy Outlook yesterday also added downside pressure as the organization revised their dry gas production estimates higher. They upped 2022 expectations by .6 percent to 96.7 bcf/d, and their 2023 outlook was increased by 1.2 percent to an average of 99.1 bcf/d, culminating in output reaching 100 bcf/d in late 2023. In the background was a sharp drop in overseas prices as pipeline flows to Europe continued despite earlier threats from Russia to retaliate against Western sanctions by stopping flows. Tomorrow’s storage report is estimated to show a 117 bcf draw compared to the 5 year average decrease of 89. A higher than expected drawdown could go a long way toward shoring up the recent downside momentum as current end-of-season estimates hover in the 1.4 tcf area, which is below the 5 year average but seen as manageable. Today’s low at 4.45 now offers initial support, with a push below there likely being held up at the 4.35 area. A move higher will find resistance near 4.72 which marks a 38 percent retracement of this weeks break.
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