Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex found heavy selling pressure as the COVID lockdown in Shanghai was expanded and crude oil stocks in the US showed a build in the DOE report. In the background were expectations that members of the IEA would move to release additional stocks from their SPR’s. Calls from European nations continue to stress the need to cut reliance on Russian imports of gas and oil, as the atrocities linked to the Russians in Ukraine appears to be softening resistance to an embargo or increased tariffs on Russian energy imports into Europe. Congressional investigations into high gas prices also weighed on sentiment as participants focused on the large margins for gasoline at the pump.
The DOE report showed a build in crude stocks of 2.4 mb compared to expectations for an equivalent decline, as production increased to levels not seen since the pandemic began. Commercial crude inventories are at 412.4 mb, well off last year’s levels. Strategic Petroleum Reserve stocks fell 3.7 mb to 564.6 mb compared to 637.8 a year ago, the lowest level since April 2002. Talk continues to center on the absolute level of reserves but given that the US is considerably less reliant on crude imports than in the past, comparisons to periods prior to the shale revolution beginning in 2015 are problematic. One aspect that needs to be focused on is the level of domestic production, which reached 11.8 mb in the current reporting week, the highest since December of 2021. Refinery utilization continues to rise, reaching 92.5 percent compared to 92.1 last week as margins remain attractive. Inventories fell 2 mb in gasoline and rose .8 mb in distillate. Usage rates appear to be pulling back as high gasoline and distillate prices bite into demand. Product supplied totaled 19.8 mb compared to 19.3 in 2021 when the economy was only beginning to strengthen following the ravages of COVID-19. No Russian imports were taken in this week while exports of crude and products reached 1.3 mb/d compared to net imports of 1.0 mb/d last year.
The markets breakdown might foreshadow further declines that could carry values toward the 92.00 area basis May where support should develop.
Natural Gas
Prices continued their rapid climb over the last two sessions, reaching an intraday high at 6.394 this morning before finally running out of steam late in the session. The market remains underpinned by the war in Ukraine and concerns over US production levels. Although output briefly reached the 95 bcf/d level late last week, it has settled back toward the 94 area as fears increase over adequate summer restocking unless output begins to show consistent improvement. Tomorrow’s storage report is estimated to show a 26 bcf draw, likely the last decrease of the season, and would put total stocks near 1,389 bcf. This would put EOS stocks nearly 17 percent below the 5-year average. With momentum from speculative buying and likely extensive short covering fueling a large part of the recent spike, look for the market to retrench near term with the 5.67 and 5.45 levels marking a 38 and 50 percent retracement of the rally since mid-March. The upside target on a return of strength remains in the 6.50 area.
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