Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex traded on both sides of unchanged before settling higher in crude and sharply higher in ULSD. The mixed trade reflected a market torn between conflicting indicators suggesting recovering demand in China offset by growing concerns over US monetary policy aimed at slowing growth to limit inflationary pressures. A decline in short term interest rates, a recovery in equity values, and dollar weakness helped uncover better buying interest ahead of the weekend with December crude settling up 54 cents as support in the 83-84 area continued to hold. ULSD showed outsized gains relative to both crude and gasoline, settling higher by 6.94 cents as tightness persists for middle distillates in Europe and the US.
The appearance that demand is holding up in the US and China is beginning to provide support as US SPR releases run their course. 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 third quarter Chinese GDP could prove disappointing, it does appear as though a recovery is underway with reports that their policy toward COVID might begin to ease. In addition, their sharp increase in export allocations for refined products should help underpin sentiment on ideas it will increase availability in Asia.
With the OPEC cutback still fresh and suggesting a contraction in availability of close to 1 mb/d in November along with the cessation of SPR sales, we see the market getting increasingly tighter just as Europe bans Russian imports on December 5th. There is potential for prices to advance toward 100-102 by early in the first quarter of 2023 as stocks remain low in the Western Hemisphere, and as demand for middle distillates trends higher into winter. 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, but the NWS forecast for equal chances of above and below normal temperatures from November through January in the US appeared to have little impact on sentiment.
Natural Gas
There was no relief from the relentless selloff as prices saw steady downside pressure throughout the day before ending lower by 36.6 cents at 5.472 basis December. Today marked the sixth straight session with a lower close as the market lost $1.355 on the week. Weather has been the main driver, as mild temperatures expected into early November were again revised substantially warmer overnight to further dampen demand expectations. Yesterday’s storage report was above estimates, showing a 111 bcf build to mark the sixth straight week of triple digit increases, a new record for the season. Overseas markets remain a negative background influence as warm temperatures and nearly full storage in Europe have pressured prices. With the late June/early July lows taken out today and another weak close, followthrough weakness is likely near term. There is no obvious support until the psychological 5 dollar level on the December contract. With the RSI dropping below 20 percent today, a relief rally appears imminent, with the 5.75 area as initial resistance. Any signs of a swing toward a colder temperature pattern could see a rebound that quickly targets Monday’s chart gap at 6.772.
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