Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex traded sharply higher today, building on gains established yesterday after reaching a low of 84.70 basis December early in the session. Strength was linked to moves by Chinese authorities to ease some of the country’s strict Covid guidelines. Changes included shortening quarantine times for close contact cases and inbound travelers, as well as eliminating penalties on airlines for bringing in infected passengers. The steps were small but do show some movement by the Chinese government toward easing the strict zero policy guidelines that had been weighing on sentiment in the oil markets given the uncertainty it posed for their economy.
While hope regarding Chinese Covid regulations certainly helped the marked change in sentiment, we are doubtful that it is the only bullish influence. The cessation of crude sales from the SPR at the end of this month should tighten inventories even further. In addition, we suspect that Chinese economic concerns for the most part are priced in. A marked pickup in Russian shipments might provide the appearance of supplies easing in the near term, but the price cap by the G-7 along with the ban on crude oil exports on December 5th should lead to tightening Russian availability. With the potential, that OPEC+ will remain cautious on production and respond to surplus supplies when necessary, there appears to be little evidence of any major change in policy as we approach the OPEC+ meeting in December. Although we see the market maintaining a rather consolidative tone in the near term, the low of 84.70 basis December should hold as a significant base of support as the market assesses prevailing trends in inventories. We see the potential for a test of the 99-101 level for prompt crude in the intermediate term.
Natural Gas
Following its recent script, the market has gyrated on weather runs and rumors, with the Tuesday-Wednesday downdraft being reversed yesterday as forecasts turned colder and the weekly storage report was on the low end of estimates. The 79 bcf build compared to estimates near 84, leaving total stocks 2.1 percent below the 5-year average. The recovery continued into the early session today as forecasts held onto the colder expectations, with the December testing the 6.50 level. After making those highs, the market appeared to fall prey to another round of unsubstantiated rumors regarding a delay in Freeports’ return. The ensuing freefall saw prices retrench by over 60 cents as the December settled at 5.879 for a loss of 36 cents on the day. As we near the ides of November and the long-suggested return of Freeport exports, the truth will have to be revealed soon. If they are delayed, the market could test the lows near 5.35, with 5 dollars a possibility as attention might then be drawn to the ample storage situation in Europe. If operations resume on schedule, prices could quickly retest the 6.50 level with 7 dollars possible on an overreaction.
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