Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex attracted good buying interest following yesterday’s solid recovery. The strength was linked to reports that peace talks between Russia and Ukraine had reached a dead end, and the IEA Monthly Report suggesting that Russian output losses might expand from 1.5 mb/d in April to as much as 3.5 mb/d in May. The shortfall highlights the fragility of the global supply/demand balance, with low inventory levels that will continue to be challenged by declining output in Russia. Although some of this is being relieved in the short term by a historic release from global Strategic Petroleum Reserves along with contraction in growth rates in China, it does not appear to be enough to avoid further inventory declines in the short term unless demand contracts sharply as consumers shift discretionary spending from travel due to inflationary pressures and the accompanying rise in interest rates.
To some extent the most recent DOE report did show this occurring, as commercial crude inventories rose by 9.4 mb including 3.9 mb released from the SPR. Total stocks of crude and petroleum products including SPR rose 3.5 to 1,711 mb but were still below the levels of 1,920 mb seen last year. Gasoline stocks fell 3.6 mb while distillate was off 2.9 as refinery utilization pulled back to 90 percent from 92.5 last week. Product supplied continues to contract, falling marginally to 18.8 mb compared to 20.3 last year with gasoline at 8.7 mb compared to 8.9 and distillate at 3.5 compared to 4.2 a year ago, while jet kero supplied was 1.6 mb compared to 1.4 a year ago.
Some key takeaways from the IEA Monthly Report released today:
-Demand was revised downward to 99.4 mb/d, off 260 tb/d from the prior month estimate but still an increase over 2021 of 1.9 mb/d.
-Global supply in March reached 99.1 mb/d but declining supplies from Russia due to sanctions are likely to total as much as 3 mb/d.
-Global oil inventories have decreased for 14 consecutive months, with February stocks 714 mb below the end 2020 level of 2,611 mb. For March, data suggests a build of 8.8 mb.
The market appears to have priced in SPR releases along with the demand impact of Chinese Covid lockdowns. After today’s DOE numbers, future reports will be watched closely to see if the upward trend in inventories continues. For now, it looks like Monday’s lows near 93.00 represent an intermediate bottom and developing tightness in Russian supplies along with the possibility of additional sanctions should underpin the market and help values recover toward the 115.00 level on prompt crude.
Natural Gas
After 8 straight sessions with a new intraday high the market finally reached the 7 dollar level, with the May peaking at 7.047 before ending with a gain of 32 cents to a contract high settlement price of 6.997. The summer contracts also managed settle through that level as fears of tightness due to lagging production and strong LNG demand spurred prices higher. A drop in output today to near 93 bcf got the ball rolling, while forecasts continue to supply enough demand through the end of the month to keep stocks trending further below average. Tomorrow’s weekly storage release is expected to show a 15 bcf injection against the 5-year average of 33, which would increases deficits further. Today market the third session with the RSI above 80 percent, and we continue to expect a substantial retrenchment due to the speed and extent of the recent move. The 6.50 level would appear to be initial support, with a 38 percent retracement of the rally since mid-March all the way down at 6.08. The charts are void of any obvious resistance, with the 7.35 area on the weekly and monthly charts a misnomer from the wacky expiration of the February contract, and beyond that nothing until double digits.
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