Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex continues to attract good buying interest with values testing above 110 for the first time since late March. The strength to values in the face of weak global equity markets and concerns over the prospects for global economic growth continues to be linked to a variety of influences which include:
- A looming EU embargo on Russian oil.
- OPEC+ restraint on increasing output following their meeting yesterday, which saw the group approving an output increase of 432 tb as expected. In March they failed to meet their production target by 1.45 mb/d with Angola and Nigeria accounting for 700 tb/d and Russia responsible for 300 tb/d of the shortfall. They have repeatedly rebuffed calls for other producers such as Saudi Arabia and UAE to expand production, alleging under-investment is to blame, while others feel that the political alliance that has been formed with Russia and OPEC along with tense political considerations with the US are the issue.
- Passage by the Senate Judiciary Committee yesterday of the bipartisan NOPEC bill, which could expose OPEC and partners to lawsuits for price collusion by changing US anti-trust law to revoke sovereign immunity that has protected the cartel.
- The plan to buy back 60 mb of crude for the SPR following the releases this spring. The timing of these purchases will be the fall of 2022 and has raised concerns that the purchases will exacerbate tightness into winter.
With inventories at extremely low levels, particularly for heavier oils as demand from Europe for US physical barrels competes with strong domestic usage rates, further tightness in supply availability appears inevitable. Although concerns over the Chinese and European economy remain a potential negative, the demand response is unlikely to contract quickly. Therefore, we still see the potential for values to recover toward the 115 area.
Natural Gas
The market finally experienced a wave of profit taking after 5 straight days of gains, but not before managing to test the 9 dollar level early in today’s session. Prices ended at 8.043 basis June for a loss of 74 cents on the day. Yesterday’s storage report indicated a 77 bcf injection, well above estimates near 68, but did very little to slow the market as prices moved markedly higher soon after the release. Selling interest was piqued this morning by signs of production improvement, as output crept toward the 95 bcf level the last two days. Minor revisions lower in expected CDD’s over the next two weeks added to the negative bias. As expected the pullback quickly gained momentum as prices traversed a dollar range and put in a key reversal on the charts. The 8 dollar level held up for now, but is likely to get violated in the near term with 7.73 and 7.43 the ensuing support levels. The market will need to settle through the 9 dollar area to reinvigorate talk of a push to double digits.
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