Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
petroleum complex traded on the defensive on selling linked to US and Chinese economic prospects partially offset by supply concerns tied to the OPEC+ decision last week to cut production levels more than expected along with movement by the G-7 to place a price cap on Russian oil. Fears it will lead to additional cutbacks in the supply of Russian crude and possibly be seen as a threat to OPEC’s power over supply helped moderate declines early but late pressure developed on recessionary concerns.
We still see the modest losses relative to last week’s strong gains, 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 last week to curb production in a way that supports Russia and their aggression against Ukraine. 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 and regional instability.
Despite the possibility for further liquidation pressure in the near term on an overbought condition, 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 also 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. Key to the outlook will likely be the CPI report on Thursday, Oct 13 that will have a profound impact on dollar direction, interest rates, and the global economy overall.
Due to the Columbus Day holiday, the DOE report will be released on Thursday, at 11:00 ET.
Natural Gas
The natural gas market came under concerted price pressure penetrating the 6.50 support area. Selling linked to larger than expected storage injections evident recently due to near record high US production levels in recent weeks and expectations it will remain high along with the uncertain economic outlook appeared to encourage the liquidation pressure. Nevertheless, the prospect for colder condition to develop in the Eastern half of the US over the next 10 days should help increase usage and moderate further declines in values toward the 6.20 area basis November. Toward the level we look for better support to emerge on the prospect that LNG exports will begin expanding in November along with seasonal demand.
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