Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex, and particularly crude, failed to follow through on early price strength and settled sharply lower. The initial buying was linked to sanctions imposed on Russian crude and on hope that a loosening of Covid restrictions in China would boost demand. The import embargo of Russian crude by the EC and UK, along with the G-7 curbs on shipping, insuring and funding Russian crude through a price cap on sales above a 60.00 per barrel threshold, posed additional uncertainty over the adequacy of inventories and future supply availability. Questions persists over whether Russia will refuse to accept the price cap or merely cut back production and work around it by shipping and insuring their own oil to those countries not party to the sanctions. It is reported that the price of Urals crude exported from Primorsk, on the Baltic Sea, was at 53.50 ahead of the price cap. That does not include insuring or shipping, which is not included in the price cap.
Today’s strong reversal to the downside was linked to questions over how quickly the Chinese economy will revive, and on what looks to be an ample current inventory situation due to past inventory building at the secondary level and the drying up of demand for Russian oil over the past month. The ample availability was reflected in recent moves by the Saudis to offer supply for January delivery to Asia at a smaller differential than last month. The OPEC+ decision to rollover the current output curb of 2 mb/d was expected. In the background was dollar strength and higher interest rates.
Despite the sharp pullback, we expect follow-through to be lacking, with support emerging near the 75.00 area basis January once again. US stock levels remain tight due to heavy exports. The absence of additional SPR sales will continue to strain available supplies, keeping pressure on stocks. Although secondary inventories have built in anticipation of a contraction in Russian supplies, it is likely to be temporary as the Northern Hemisphere winter sets in.
The DOE report will once again be a key consideration for the inventory situation. Expectations suggest a draw in crude of 3.8 mb, a build in gasoline stocks of 2.4 and an increase in distillate of 2.1. Refinery utilization is expected to increase by .2 to 95.4 percent.
Natural Gas
Weakness continued into the new trading week as prices gapped lower overnight and remained weak throughout the session, settling with a loss of 70.4 cents at 5.577 basis January. Weather continued to drive the market as Sunday’s model runs removed as much as 40 bcf in demand from the 15 day expectations, with much of that coming out of the more reliable front half of the forecast. Freeport’s statement late last week of a delay of their restart into the second half of January lead to market speculation today that it could be even later, and added to the downside pressure. Afternoon weather runs continued to trend warmer, flushing out additional longs late in the session. Today’s move ran through all obvious support, and we have to look at a weekly chart to find the 5.30-5.35 range as a point that could slow the fall, and below there the 5 dollar level should offer solid support. Any change in sentiment with a swing to colder temperatures would have an initial target of filling this mornings gap at the 6.22 level.
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