Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The market stabilized from early losses linked to yesterday’s announcement of a release of Strategic Petroleum Reserves by the US. The announcement follows OPEC+ short and truncated meeting and announcement that the group would do little to add additional supplies to the market beyond scheduled increases already agreed to prior to the Ukraine invasion. Given the large backwardation that has been apparent in the market, the US effort to release reserves on an emergency basis and replace it with cheaper barrels apparent in the back months appears to be a plausible plan.
The sharp contraction in the backwardation of May WTI crude to Dec 22 from 19.99 reached on March 24 to as little as 8.68 today appears to reflect the prospect that the additional barrels from the reserve release will go a long way to stabilizing prospective supply tightness without waiting on OPEC to increase production and will help support fresh capital investment in areas outside of OPEC+ such as in the US and Canada due to the strength in the back months of the forward curve. The action to supply as much as 1 mb/d over the next 6 months from the US Strategic Oil reserves along with the consideration by other countries within the International Energy Agency to take similar action should help address and to an extent achieve a more balanced market helping digest the contraction in Russian availability expected in the months ahead. In addition, OPEC+’s failure to address this imbalance; as they suggested they would in previous meetings, might put additional pressure on those members that have the capacity to expand production to ease upward pressure on prices and likewise limit the production response outside OPEC along with limiting the demand destruction that high product prices might have.
Natural Gas
The Nat Gas continues to show limited downside movement and held support at 5.45-5.50 basis May before surging back toward yesterday’s high of 5.832. Values continue to assess the ongoing tightness in international Nat Gas markets against a rather stable domestic market that is characterized by expanding export demand and modest increases in domestic production as demand slows seasonally. Strength to the US economy, despite rising interest rates remains supportive as well. International prices also underpin US values with reports of European gas trading at 38.00 per mbtu. Near term we look for modest resistance to develop above the 5.80 area reflecting milder weather conditions into mid-April and lower HDD for the US. The strength to the US economy along with uncertainty over European valuations should limit any large scale breaks on seasonal considerations into May to near the 5.20 area unless a major break in Russian tension arises. 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 yesterday showing an injection of 26 bcf failed to dent the bullishness in the market as it looks for a withdrawal in next week’s report.
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