Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex attracted increased support throughout the session, settling $2.45 higher basis December. Yesterday’s weakness was reversed on the belief that the reaction to reports that the Biden Administration was releasing 15 mb from the SPR for delivery in December was overdone. The initial plan had mandated a sale of 180 mb out of the SPR, but due to slower than expected purchases in the summer, 15 mb were unsold. Those barrels will now be offered for sale in November for delivery in December. Additional selling was seen in response to the delay by China of their release of 3rd quarter GNP numbers. The action raised concerns that the government was reluctant to announce the numbers during their annual Congress due to more substantial weakness than had been expected.
Support emanated from reports that despite planned SPR releases, the Biden Administration was looking to begin repurchasing oil if values fall back between 67.00-72.00. Ideas this will provide a strong support level and encourage production to expand, along with deflecting OPEC criticism of a price cap on Russian oil that will come into effect in December also helped support values.
The DOE report encouraged the best buying interest despite the other headline news. It showed commercial crude inventories fell by 1.7 mb, with 5.3 mb withdrawn from the SPR. In products, gasoline fell by .1 mb and distillate rose .1 mb. Total commercial stocks of crude and products fell 2.5 mb while refinery utilization fell to 89.5 percent from 89.9 last week. Net exports of crude and products were 1.7 mb compared to 2.0 mb previously. Disappearance levels rebounded with total products supplied reaching 20.8 mb.
China remains a key to demand trends. A more stimulative monetary policy is limiting concerns linked to high energy prices, shortages of natural gas, and higher US interest rates. Although 3rd quarter Chinese GDP could prove disappointing, it does appear as though some recovery is underway. In addition, their sharp increase in export allocations for refined products should help underpin sentiment on ideas it will increase availability in Asia. We expect caution ahead of Chinese GDP data due out tomorrow with expectations pointing to a 3.4 percent increase.
The recovery today has taken us back above the support near the 83-84 level basis December. We see the potential to advance toward 100-102 by early in the first quarter of 2023. Stocks remain low in the Western Hemisphere, and as demand for middle distillates trends higher into winter, supply tightness will become more apparent while Russian availability should contract as the European import ban takes effect on December 5th. 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 against a backdrop of lower OPEC+ production. The NWS will release their seasonal outlook tomorrow which should have an impact on first quarter sentiment.
Natural Gas
The market continued to struggle, losing 25 cents yesterday and following that up with another 28 cent slide today. The November contract ended the session at at 5.462, while the soon-to-be front month December settled at 5.928. Price drivers remain the same, with mild temperatures expected into the end of the month likely to keep storage builds ample and ease concerns about stock levels going into the winter withdrawl season. Tomorrow’s report is expected to show a 105 bcf injection compared to normal for this time of year at 73. The improved storage situation in Europe has also had a dampening effect, as their inventory rebuild is ahead of schedule and has exerted substantial downside pressure on European benchmark prices. Looking to the December contract, the poor close looks likely to pressure prices near term to the mid-summer lows near 5.60. The oversold condition of the market and impending return of Freeport LNG should then begin to underpin prices as we move into winter demand season. Signs of cold temperatures could spark a rally that would initially target last weeks chart gap at 6.772.
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