Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex retraced following yesterday’s strong gains as the market focused on the impact of rising interest rates and a strong dollar on economic growth.
The IEA Monthly report highlighted current market challenges. They suggested the relentless deterioration of the economy and higher prices recently evident following the OPEC+ cut would lead to a decline in demand of over 340 tb/d in the fourth quarter. Demand growth was reduced for 2023 by 470 tb/d to 101.3 mb/d. World oil supplies rose by 300 tb/d in September to 101.2 mb/d following a massive 2.1 mb/d increase during the third quarter. Due to the OPEC+ decision supply growth during the fourth quarter is expected to slow. Russian export levels fell by 230 tb/d in September which is only down 560 tb/d from pre-war levels. Europe continues to depend on Russia for over 50 percent of their import volume, which should be a growing concern given the EU ban on crude imports that goes into effect in December.
In the background as a negative influence was the DOE report released yesterday. It showed commercial crude inventories building by 9.9 mb/d with a draw in the SPR of 7.7 mb. Gasoline stocks increased by 2 mb while distillate continues to tighten as stocks fell by 4.9 mb. Total commercial crude and product stocks rose by .3 excluding the SPR release. Net imports of crude surged back to 3.2 mb compared to 1.4 last week while usage rates contracted to 19.3 mb for total product supplied compared to 20.8 in the prior week. Gasoline disappearance showed a marked decline to 8.3 mb from 9.5 last week. A key contributor to the inventory increase was the decline in refinery utilization to 89.9 percent compared to 91.3 previously as seasonal maintenance takes place. Net exports of crude and products were 2 mb/d compared to 3.3 last week and net imports of 2.3 last year.
We look for support to November crude in the near term toward the 84.00-85.00 level. Stocks remain low in the Western Hemisphere, and as demand for middle distillates trends higher into winter, tightness in supplies should be apparent. In addition, Chinese demand should ramp up as export allocations increase into the new year. The approach of the Northern Hemisphere winter will also have an impact, with any colder trends intensifying inventory issues in Europe and the US.
Natural Gas
The market struggled to maintain recent gains as the realities of the current storage situation sunk in. The 125 bcf build had been brushed aside yesterday as the market added 30 cents on short term justification from cold temperatures in the East and a pullback in production, with spillover support from the substantial rebound in equities. With natural gas stocks on a roll of 4 straight triple digit builds with another possible next week, we are working toward a more comfortable end-of-season stockpile. In the background European storage levels are also being topped off, which has been reflected in cooling prices overseas. The end result was an inside day on the charts with poor volume as the market levitated back to where we were two weeks ago, settling at 6.453 for a loss of 28.8 cents on the day. The path of least resistance appears to be lower, with last week’s double bottom near 6.305 the initial target with the 6-dollar level as psychological support below there. Resistance emerges at the 9-day moving average near 6.70.
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