Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex failed to respond to continued tightness in supply availability due to modest increases in OPEC supplies, tightness in Russian availability, and drone attacks over the weekend on Saudi refining facilities by Houthi rebels. The market instead focused on widespread COVID-19 lockdowns in China. Values deteriorated sharply in the morning as concerns grew over demand following announced lockdowns in Shanghai after a surge in COVID-19 infections. The two-stage lockdown that became effective Monday would involve as many as twenty-six million people and raised concerns over additional measures in other areas. The moves could lead to a reduction in demand by the world’s largest importer of as much as 800 tb/d in April. Indications of progress in negotiations that begin Tuesday in Turkey between Ukraine and Russia helped uncover long liquidation as well.
The sharp break, which carried values in WTI over 9 dollars lower to the 104.50 level basis May, found some support as doubts over the impact of additional lockdowns on the Chinese economy emerged, along with ideas OPEC was standing firm on the pace of production increases and was still largely aligned with Russia toward maintaining the current arrangement as we near the next meeting of OPEC+ on Thursday. Fears that as much as 2.5 mb/d of Russian crude and products will be lost in April due to sanctions, along with low OECD stockpiles, should underpin prices to the 104.50-105 level basis May, but questions about demand amid economic uncertainty in China and the US should limit upside to the 113-115 area. A break below the 104.50 level opens the potential for a retest of 100.00.
The DOE report on Wednesday is expected to show crude inventories down by 1.6 mb, gasoline lower by 1.9 and distillates off 1.7. Refinery utilization is expected higher by .2 to 91.3 percent.
Natural Gas
The market probed to another high overnight before profit taking emerged to reverse the trend, as the May contract ended the session lower by just over 7 cents at 5.538. Strong LNG flows (over 13 bcf for 6 straight days) coupled with steady production over the weekend kept the market well bid on the reopen, but buying dried up as forecast revisions backed off the cooling expectations in the middle of the 15 day outlooks. Some of the strenght late last week was predicated on an expected swing back to withdrawls following this Thursday’s likely build, upping the possibility of the EOS storage dropping toward the 1,350 area, but today’s revisions have weakened that argument. The market tested trendline resistance today off the November and February highs above 5.65, and the overbought technical setup will likely lead to further weakness near term. Initial support comes at the 5.25 level, which marks a 38 percent retracement of the rally since mid-month, and beyond that at the 9 day moving average near 5.20.
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