Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
Volatility remains a hallmark of the petroleum complex as trade assesses the short- and longer-term prospects for supply and demand. The supply response remains uncertain as Western powers opposed to the invasion of Ukraine continue to search for ways to replace reliance on crude and products from Russia. The actions include additional releases from strategic reserves, increased production from shale regions, and more conciliatory diplomatic moves toward Iran and Venezuela, who are currently under sanctions. Comments earlier this week by the UAE Ambassador to the US that they would favor production increases were later contradicted by their energy minister who indicated that they were planning to stick by the output pact agreed to with OPEC+, which has coordinated production by the cartel and its allies, including Russia.
Longstanding disagreements remain in the background affecting relations between Saudi Arabia, the UAE and the US over Yemen and treatment of MBS after the killing of Jamal Khashoggi, along with ignoring concerns over the influence of Iran within the region. Whether an accommodation can be made on increasing production by these two countries remains a key consideration for price direction and might need to be tied to increased weapons sales to these countries and support for the war in Yemen. The complicated politics involved does not bode well for a quick solution. Subsequently support at Wednesday low at 103.63 basis April crude could prove to be stiff and potential to return to the 118-120 area cannot be ruled out. Although some progress in negotiations with Ukraine were reported by the Russians, we remain skeptical. Nevertheless, a breakthrough in peace negotiations would remove a lot of uncertainty regarding economic growth prospects, and ease concern on the demand side as well. Inventory levels will be a key driver of price direction, and the potential for further declines remains a primary concern.
Natural Gas
Prices have steadily moved higher since the release of the weekly storage report yesterday that showed a 124 bcf decrease in stocks, as the market ended the session today at 4.725 basis April for a gain of 9 ½ cents. The higher than expected draw left total stocks at 1,519 bcf, approximately 16 percent below the 5 year average. As we near the end of withdrawl season, estimates are zeroing in on the 1.4 tcf area for EOS stocks. The next two releases (for weeks ending March 11th and March 18th) are expected to show draws, while the report on March 31st (for the week ending March 25th) is widely believed to indicate the first injection of the year. Additional support was offered by cold temperatures currently being experienced in Texas and Oklahoma that will lead to a short term dip in production due to freeze-offs, with a drop under 92 bcf seen today. The 4.60 level now looks like initial support on any retrenchment, with 4.82 risistance on the upside followed by 5.00 if the situation in Ukraine deteriorates further and reignites European gas prices.
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