Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex came under pressure, with April WTI trading below 74.00. The weakness reflects the recognition that supply availability has improved given recent increases in US inventory levels, along with Russian availability exceeding expectations despite announced production cuts. Better availability in Europe following a warm winter has also been seen, along with the start of shipments over the next few days from Kazakhstan via Russia’s Druzhba pipeline to Germany. Adding caution to trade was the delayed DOE Report scheduled for tomorrow, along with the release of the US Federal Reserve minutes today.
Fed policy continues to be a concern given the recent rise in interest rates and its impact on the dollar and construction activity. Although increases in other areas of the economy continue to be seen, the concern over disappearance rates for middle distillates, particularly in the construction sector are a concern, and have likely contributed to the weakness in margins.
The DOE report tomorrow will be watched closely for current disappearance rates. It is expected to show crude inventories built by 1.2 mb, distillate down 1.0 and gasoline lower by .6 mb. Refinery utilization is expected to be lower by .2 to 86.3 percent.
The breakdown today has exceeded the 74.50-75.00 support area. Although US disappearance has recently been disappointing, we expect it to pick up as we move closer to the second half of the year. The economy remains buoyant, which should provide a basis for a recovery in demand, while the Chinese economy appears to be gaining steam. Although higher interest rates pose a threat to the recovery, we see the market moving into a deficit situation on a global level later this year. How large those deficits are will help determine how much prices can recover, with the 80-82 range key near term resistance.
Natural Gas
Since our last report, prices have experienced additional weakness as the March contract trading below 2 dollars overnight before finding steady buying interest during the day session to settle 10 cents higher at 2.174. The active April saw gains of 12 cents to end at 2.298, further widening its premium to the front month. As was the case last week, steady production near 98 bcf/d and a complete lack of weather risk has kept pressure on prices. Today’s bounce was attributed to the announcement that Freeport had received regulatory apporval to resume commercial operations. How quickly they will actually begin cooling gas remains in question, with the shoulder months recent gains verses the March indicating that it may still be 1-2 months away. Winter storm Olive, which is set to bring snow and cold across the Northern US in the coming days, was blamed for some of the strength, but overall demand is not expected to spike significantly in its wake. Tomorrow’s storage report is estimated to show a 67 bcf build verses the average for this time of year at 177. As we move attention to the April contract, the 9-day moving avearge near 2.45 was tested today and marks initial resistance, with a settlement through that level signaling follow-through that could test recent highs in the 2.70 area. Support rests at 2 dollars, and a move below there would raise the likelihood of a dump to the 2020 lows near 1.43.
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