Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex continued to attract support on US inventory declines, along with rumors the Chinese government is considering easing Covid regulations, while some caution was apparent ahead of the Fed announcement regarding the outcome of their meeting that ended today.
The DOE inventory report showed a slowing in SPR sales and a decline in commercial crude inventory levels of 3.1 mb. Gasoline inventories fell by 1.3 mb while distillate rose .4. Due to increases in propane and other oils of 1.2 and 1.4 mb respectively, total commercial stocks of crude and products fell by .7 mb to 1,224.1 compared to 1,233.9 mb last year. Disappearance levels remained buoyant at 20.5 mb. Net exports of crude and products contracted to 1.4 mb compared to 3.0 mb in the prior week as crude export levels fell to 4.0 mb and product exports fell to 5.5 mb. It is interesting to note that sales from the SPR, which currently stands at 400 mb, have totaled 212 mb since last year and overall stocks of crude and products are still 10 mb below year ago levels despite the sizable sales, suggesting that commercial inventory declines are likely to steepen in the absence of more aggressive SPR sales.
A contraction in economic growth will help ease inventory declines, along with the potential decrease in export demand. Reports from China that suggest the Politburo had tasked a reopening committee to investigate scenarios with the goal of loosening Covid regulations by March 2023. This might help reverse a stalling in demand growth in 2023, keeping the statistical balance tight particularly if pent up demand in that country is unleashed.
Weather and better availability from Russia will pose resistance near term toward the 91.50-92.00 level basis December, but declines are likely limited to the 84.50-85.50 area as questions over inventories reemerge in advance of price caps on Russian oil by the G-7, along with the embargo of Russian crude oil imports by the EU on December 5th. The potential inventory declines, particularly for middle distillates, should underpin values and lead to an eventual test of the 99-101 level in the intermediate term.
The Federal Reserve raised the Fed Funds target as expected by .75 percent to 3.75-4.00. They indicated that they would consider the lags in economic impacts in future decisions, which was treated as moderately friendly.
Natural Gas
Prices have seen whipsaw action over the last few sessions, with Monday’s gains being entirely forfeited yesterday, only to be recovered today as the December ended with a gain of 55.6 cents at 6.268. Weather has been the main driver of the volatility as forecast revisions have oscillated between a warmer and colder trend into the middle of November. Today’s rally also found limited resting resistance as the market has traversed this price range multiple times recently. A large drop in production, with early nominations at 96.5 bcf, lead to some buying interest, but that number likely gets revised higher this afternoon as is typical early in the month. Another day without an announced delay of Freeport’s return also gave bulls some confidence. Tomorrow’s storage build is estimated at 97 bcf compared to the 5-year average increase of 45. With the upside price moves being driven by forecasts that are suggesting near normal temperatures, there doesn’t appear to be enough positive fundamentals at the moment to push values considerably higher. Look for the 20-day moving average to hold resistance near term, with 6 dollars the first substantial support level. If temperatures can maintain the colder tilt for a couple of consecutive days or signs of activity from Freeport emerge, the mid-October gap to 6.772 remains the upside target.
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