Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex continues to recover following the sharp declines in early Tuesday trade, that carried values to below the 100.00 area basis May WTI. The recovery which has taken values at one point today to as much as 10.00 off yesterday’s lows appeared to be linked to mounting skepticism over a reported break-though in talks between Russia and Ukraine. Doubts that a cessation of hostilities will occur leading to a quick end to sanctions freeing up oil supplies from Russia continues to underpin concerns over supply tightness. As we move into April, further declines in Russian supplies are likely as sanctions further restrict movement of Russian wet barrels. Adding to tightness concerns is the damage to port moorings in Kazakhstan which has curbed oil exports at the CPC marine terminal on the Black Sea which typically move cargoes to Europe exacerbating tightness in that area. With OPEC suggesting little change in current policy to avoid political conflict among its members and allies including Russia along with the over-compliance with output cuts by many producers due to material shortages and supply chain issues, tomorrow’s meeting of OPEC+ is unlikely to ease concerns over growing tightness in supplies. In addition the prospect of additional sanctions also remain in the background with Germany preparing power rationing proposals in the event Natural Gas from Russia is cut off.
Although the supply side is getting considerable attention, the demand side cannot be neglected. The widespread COVID-19 lock-downs in China is expected to help reduce consumption at least in April by up to 800 tb/d. In addition, the high gasoline prices in California appear to be curbing mobility in that region. We suspect that it might spread to other areas as hybrid work policies continue to be assessed given the impact of commuting on employee’s discretionary income and the tight labor market demanding employer concessions. By how much this might affect demand for gasoline and diesel remains open for debate but will need to be watched closely in the months to come both domestically and globally.
The DOE report showed commercial crude inventories fell sharper than expected by 3.4 mb compared to expectations for a 1 mb drop. Cushing inventories remain extremely low at 24.2 mb falling by 1 mb in the latest reporting week. Product inventories rose by .8 mb and 1.4 mb in distillate. Total inventories including products rose by 1.8 mb excluding the SPR. Capacity utilization rose 1 percent and stands at 91.1 percent. It appears that maintenance periods might be shortened to allow for higher refinery output.. Total disappearance at 19.9 was off 1.3 mb from the prior week but still remains 8.1 percent above last year for the current four week average.
The 104.50 area basis May appears to be a key swing area for values. Concerns over growing fears of supply tightness a midst the prospect 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 allow prices to retest 113-115 area but demand considerations and prospects for additional supplies from Iran should begin to pose resistance.
Natural Gas
The market surged to the upside and looks poised to take out contract highs at 5.707 basis May and advance up toward the 5.80 area. The strength to values continues to be associated with German hints that they may attempt a further cut in Russian gas deliveries which will further lead to further attempts to maximize export flows from the US of LNG. Germany on Wednesday triggered an emergency plan to manage gas supplies in an unprecedented move that would allow the German government to ration power if gas supplies are disrupted. The action follows moves by Russia to force buyers to pay for gas exports in rubles. US investment to maximize exports of LNG remain, given that prices in Europe are up to 7 times those in the US. The prospect that Europe will do all they can to reduce reliance on Russia for their Natural Gas supply not only in the near term but also in the longer term continues to advance ideas that export levels will continue to increase and steadily tap US supply availability. The EIA report tomorrow is expected to show an injection of 9 bcf compared to 7 a year ago and five year average withdrawal of 23.
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