Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil prices surged to the upside, taking out prevailing resistance above the 92.00 level and reaching a high of 94.04 before settling 3.29 higher at 93.68 basis November. Growing concerns over inventories at Cushing, bans on Russian fuel oil exports to combat rising consumer prices, production cuts by Saudi Arabia, and favorable margins overseas continue to widen the backwardation in the nearby crude contracts and are keeping the premium of Brent to WTI tight.
The DOE report failed to dispel the bullish tone, with Cushing stocks falling by .9 to 22.0 mb due to strong refining and export demand. Concerns are building over the oil remaining in storage, with inventory levels below 20 mb more difficult to remove and subject to quality concerns.
The DOE report showed commercial crude inventories falling 2.2 mb while gasoline and distillate stocks built by 1.0 and .4 mb respectively. Refinery utilization came in at 89.5 compared to 91.9 percent last week. Net Imports of crude rose to 3.2 mb while net exports of crude and products fell back to 1.7 mb compared to 2.3 mb last week. The higher valuations for US crude relative to other origins might discourage further exports. Product disappearance softened to 20.1 in the latest week compared to 20.9 mb previously.
Given the low inventories at Cushing, the market is likely to be cautious on the downside until they begin to rise. The cracks, particularly for gasoline, have softened and should keep refinery throughput low as seasonal maintenance takes place into October. Selling could be attracted by the possibility that demand for wet barrels will weaken given the strong backwardation and narrowing differential to Brent prices that might discourage US crude exports. The softening of US export demand will be contingent on how tight inventories get into the end of the year. The uncertain economic environment in the US and China will remain in the background along with the impact of a strong dollar on overseas demand in 2024.
Natural Gas
The market has seen indecisive action the last two sessions with a loss of over 6 cents yesterday followed up with a gain of 5.4 cents today as the November contract settled at 2.899. The buying was based on a pullback in production to the 100 bcf/d range along with spillover from strong gains in the petroleum complex. Increased demand expectations from forecast revisions added background support, but weather is losing its leadership role for the time being. Tomorrow’s storage report is expected to show an 88 bcf stock build, which compares to the 5-year average increase of 84. Seasonal maintenance on the production side could begin to be offset by a similar slowing in LNG exports, making upside follow through difficult to muster. The settlement today remained under the 9-day moving average and makes that level, currently near 2.92, initial resistance. Beyond there trendline resistance off the August highs comes in the 2.97-2.98 range. Weaker prices will find minimal support until Tuesday’s low at 2.796.
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