Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex traded sharply higher with values showing gains of over 5.00 per barrel early in the session and reaching a high of 84.56 basis November before settling at 83.60.up over 4.00. The strength appeared to be primarily linked to the following considerations:
– Reports OPEC+ was considering an output cut in excess of 1 mb/d with the potential for additional voluntary cuts by some individual members. The prospect of additional production cuts even with OPEC+ reportedly falling short of their production target by over 3 mb/d appeared to be a concerted attempt by OPEC to support valuations following recent weakness and recessionary concerns.
– Another factor contributing to price strength were reports that China had set the size for its latest batch of oil product export quotas at 15 million tonnes. This was the largest single allotment by the Chinese government this year and took the allotment so far in 2022 on par with 2021. The action was seen as a significant change in export policy seeking to expand trade. The news was taken in a positive light as the Chinese economy attempts to recover from recent Covid lock-downs and a weak property sector.
– Additional support to the complex was linked to the weakness in the dollar and pressure on interest rates along with a recovery in equity values.
Although we are generally skeptical of how impactful a cut in production targets will be upon production levels given the need for dollars by many OPEC members, we still suspect the market will be sensitive to any sign of a recovery in the Chinese economy and the positive impact it might have on consumption trends. In addition, export demand for both US crude and products will likely remain robust keeping inventories tight as sales from the SPR begin tailing off next month. Subsequently, we see good support on setbacks with potential for values to move up toward the 86-88 range basis November WTI before better resistance emerges. Key to the outlook will be dollar direction along with interest rates. A stabler tone might remove some of the economic uncertainty that has been weighing on many markets including oil.
Natural Gas
Continued production increases over the weekend kept pressure on the market as the November contract lost 29.6 cents on the day to settle at 6.47. Output surpassed 100 bcf/d over the weekend while at the same time demand continues to fade into the shoulder season. The effect has been larger than average storage builds which are likely to continue this week. Trade is also antsy to receive updates from Freeport, with an improved timeline for return unlikely. With LNG flows dipping on planned maintenance, there isn’t much at the moment to support prices other than some tropical activity brewing that has the potential to add volatility in the coming weeks. Given the weak close below 6.50 the potential exists now for a move toward the 5.70 area basis Nov
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