Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex retraced the bulk of Friday’s sharp gains as increased Covid infections in China raised concern over additional lockdowns and economic prospects. Crude oil ended lower by 3.09 per barrel to 85.87. Additional selling evolved in response to the OPEC monthly forecast for oil demand, which was revised downward by 100 tb/d, to an increase of 2.55 mb/d, as downside risks traced to high inflation, monetary tightening, high sovereign debt and tight labor markets weigh on global growth. For 2023 OPEC expects demand to rise by 2.24 mb/d, a revision downward in their forecast of 100 tb/d.
The pullback was not surprising given that the rally on Friday appeared to have been overdone on the news that China was making changes to their Covid policy that shortened quarantine times for close contact cases and inbound travelers, as well as eliminating penalties on airlines for bringing in infected passengers. The market will likely focus on additional easing in the strict regulations expected toward the end of the first quarter of 2023, with no quick uptick in oil demand likely until then as the dollar and interest rates dictates sentiment.
We still look for underlying support to emerge near the 84.70-85.50 level basis December with last trading day nearing on Monday, November 21st. We suspect that Chinese economic concerns are priced in. The cessation of crude sales from the SPR at the end of this month should tighten inventories further. In addition, 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 OPEC+ likely remaining cautious on production and responding to surplus supply when necessary, there appears to be little evidence of any major change in policy as we approach the OPEC+ meeting in December.
The DOE report on Wednesday is expected to show crude inventories lower by .3 mb, distillate off .8 and gasoline higher by .3 mb. Refinery utilization is estimated to have increased by .6 to 92.7 percent.
Natural Gas
Prices were put through the ringer again today, as all of Friday’s losses were recovered early in the session before news out of Freeport reversed the action at midday. The December contract ended with a gain of 5.4 cents at 5.933. Significant forecast revisions were the upside catalyst, as weather models added CDD’s to the 1-10 day outlook. The Euro model showed the most substantial change, increasing demand expectations by over 4 bcf/d. Some of the downside pressure had also been eased after Freeport issued a statement late Friday denying rumors about their return to operations being delayed, but offered no further guidance. A story released by Bloomberg today indicated that Freeport will in fact be pushing back their restart to the first of the year. The market quickly dropped by over 25 cents, but avoided more substantial losses for the time being due to higher demand expectations from the cold temperatures. Trendline support off the October/November lows comes in near 5.80, with a push below there likely targeting the October lows near 5.35. Resistance should surface at the 9-day moving average near 6.19, and beyond there at Friday’s highs near 6.50.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The information and comments contained herein is provided by ADMIS and in no way should be construed to be information provided by ADM. The author of this report did not have a financial interest in any of the contracts discussed in this report at the time the report was prepared. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.
