Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex continued to surge to the upside and decisively breached what we had expected to be resistance near 88.00, reaching a high of 92.87 basis November WTI and settling at 92.64 for a gain of $4.19. The strong upside movement continues to be linked to uncertainty over supply tightness following the OPEC production cut of 2 mb/d. Due to their underproduction relative to current targets, the effective cut will be far smaller at between .7 and 1.0 mb/d.
The strong upside movement in prices instead likely reflects an expansion in the risk premium due to the uncertainty posed by what the US and Europe might do to offset OPEC’s actions and their total disregard for efforts by Western governments to sanction Russia and curtail their oil revenues. Consideration of a bill in the US Congress that would revoke the sovereign immunity of OPEC+ members, opening them up to lawsuits in the US for violating anti-trust laws, poses considerable uncertainty. The potential for restrictions on defense sales to Saudi Arabia might also heighten political tension.
Despite the possibility for liquidation pressure in the near term, other influences might be supportive to valuations. Chinese demand for crude is likely to pick up as export allocations increase to soften the impact of a reduction in global trade. With discounted Russian crude freely available in that region, profitability of product exports to other areas in Asia might help offset the impact of dollar strength, keeping demand higher than it otherwise would be. The approach of the Northern Hemisphere winter will have an impact, with any colder trends intensifying issues in Europe and the US as low inventories remain a concern with only limited relief from further SPR releases.
Natural Gas
The natural gas market managed to hold together for much of the week amid a steady stream of negative fundamentals. Yesterday’s storage report showed a 129 bcf build that was well above estimates, and is expected to be followed in the coming weeks by additional hefty injections. Production has continued to push the 100 bcf/d level while LNG flows, although showing some recent recovery, remain restrained by seasonal maintenance. The weather has obviously been a negative influence as shoulder season demand decreases have assisted with the storage improvement, but heat expected in Texas this weekend along with cool temperatures in the Northeast may have offered some support on expected demand improvement. The market had also seen a significant setback since mid-September and the oversold condition of the market likely prompted technical buying interest. Prices finally showed some vulnerability late in the session as the active November ended 22.4 cents lower at 6.748. Any downside follow-through next week would find psychological support at 6.50 and beyond there at last weeks double bottom near 6.305. A push higher will encounter resistance at yesterday’s high in the 7.20 area.
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