Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex traded on the defensive throughout the session, with pressure on values and the crack spreads developing in response to growing chances of additional COVID curbs in China stalling economic activity and likewise oil demand. In the background were weaker than expected Chinese economic numbers, with manufacturing PMI at 49.2 compared to expectations of 50 and non-manufacturing PMI at 48.7 with 50.2 expected. Reports that September oil products consumption in China rose by 9.2 percent over year ago levels were generally ignored.
The weaker global growth prospects also gained traction on the release of EU GDP, which showed inflation rising by 10.7 percent and GDP gaining only .2 percent compared to estimates of a 1 percent gain. The weaker demand outlook likely played a part in Saudi Arabia’s consideration of a cut in the price for most crude grades to Asia in December by 40 cents per barrel.
In the near term, economic concerns might press values down to the 84.00 level basis December, particularly if weather remains moderate in the US and Europe. Look for support to eventually emerge on the OPEC cutback, suggesting a contraction in availability of close to 1 mb/d in November, along with the cessation of SPR sales. This suggests the market will get increasingly tighter just as Europe bans Russian crude imports on December 5th, demand for middle distillates trends higher into winter, and substitution of petroleum derivatives for natural gas begins in Europe.
The DOE report on Wednesday is expected to show crude stocks up by .3 mb, distillate down .7 and gasoline lower by 1.2 mb. Refinery utilization is expected at 89.4 percent, an increase of .5 from last week.
Natural Gas
Colder weather revisions over the weekend got the ball rolling to the upside overnight, and buying interest remained steady throughout the day session as the December contract ended with a gain of 67.1 cents to settle at 6.355. LNG flows were maintained well above 12 bcf/d over the weekend following Cove Point’s return from maintenance on Friday, which ofered additional support. As the suggested return of Freeport LNG draws closer with no major announcements, trade may be gaining confidence in the current timeline, which likely assisted the positive swing. Despite the colder forecasts, temperatures are still only expected to be approaching normal levels by the second week of November, and with another above average build expected this week, it may be difficult for the market to follow through on today’s exaggerated move until the colder trend becomes more certain over the next few days or a positive announcement from Freeport is released. With the 9-day moving average taken out, the 20-day near 6.45 becomes initial resistance, with the mid-October gap to 6.772 remaining the target when winter materializes. Support moves up to 6.30 and failing there at 6.00.
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