Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex continues to twist and turn as a confluence of events from Ukraine to SPR releases tug at the market. The impact of high prices on demand and production against a backdrop of pre-existing inventory tightness must also be assessed. The ability of OPEC+ to provide additional supply continues to be questioned given past over-compliance with output cuts, while the effects of sanctions on Russian output and the decision by Saudi Arabia and the UAE not to inject political considerations into OPEC+ given Russia’s key role in the cartel must also be considered.
The scope of the SPR release by the US and IEA and its impact on valuations has been apparent. The announced release by the US of 180 million barrels, or 1 mb/d over the next 6 months, along with an additional 60 mb to be released by IEA members helps to alter the supply situation going forward. The impact is even more pronounced due to uncertainty over demand given the slowing in economic growth in Europe and China due to high energy prices and COVID-19 lockdowns. How much this tilts the supply/demand situation will be a key consideration for prices in the months ahead. For now questions regarding how quickly these reserve releases come to market due to pipeline capacity restraints should limit the downside, and could allow for a return of strength toward the 115-118 level in prompt crude if unexpected supply disruptions impede the flow of oil, natural gas and coal to the global market which would necessitate shifts to other sources of supply and heavier reliance on petroleum derivatives.
Natural Gas
After a brief setback on Wednesday, the rally resumed in the natural gas as the May reached up to an intraday high at 6.538 today before succumbing to profit taking late in the session to settle 8 cents lower at 6.278. Concerns over Europe’s plans to wean itself off Russian energy reliance continues to be the main supportive undercurrent as trade assesses the global consequences of such actions. Yesterday’s storage report added buying interest as the 33 bcf withdrawal was above estimates at 26 and brought total stocks down to 1,382 bcf for what will likely be the last draw of the season. Production continues to offer support as well, as it hovers in the 94 bcf/d area, while LNG loadings have lagged due to seasonal maintenance. With RSI exceeding 80 percent over the last two sessions, the market still looks vulnerable to a near term retracement that should find solid support at the 6-dollar level. A return to the upside finds the charts void of any resistance until the psychological 7-dollar level.
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