Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil traded to as high as 88.57 basis December before settling with a gain of 1.83 at 87.27. The strength was linked to rising violence in the Middle East in the wake of an attack on a Gaza hospital which killed several hundred people on Wednesday. The news raised geopolitical tension from Lebanon to Turkey and led to the cancellation of a planned summit between Mid-East leaders and President Biden. A visit with the Israeli Prime Minister took place but the failure to meet with key players on the Arab side raised the odds of direct military involvement from Lebanon and possibly more forceful actions by Iran. Reports that intelligence sources had traced the missile to the Islamic Jihad were not believed by Arab combatants as Hamas made unverified allegations that it was traced to the Israelis. The increasing violence has raised the risk premium for crude, and in turn raises the value of Saudi and other more moderate Arab countries involvement in any peace effort.
Outside of the Middle East, there continues to be favorable news on the macro front. The US economy remains in good shape with housing starts and permits holding their own despite high mortgage rates, while retail sales surged .7 percent from August and above expectations at .3. More important was Chinese GDP, which rose by 4.9 percent in the third quarter from a year earlier compared to expectations for an increase of 4.4. Chinese September Industrial production rose 4.5 percent compared to expectations for 4.3 and retail sales rose 5.5 percent year over year against expectations at 4.9. Reports that the US had agreed to lift sanctions on Venezuela’s oil industry in exchange for allowing a freer election in 2024 has been downplayed due to the limited potential for a production increase. Turkish negotiations with Iraq on reopening the pipeline to Ceyhan appear to have been completed as workers await official notification from the government to begin receiving the crude at the port.
The DOE report showed crude inventories falling 4.5 mb. Gasoline stocks fell 2.4 mb while distillate declined by 3.2. Refinery utilization rose .4 to 86.1 percent. Stocks at Cushing fell .8 to 21.0 mb, which given the approach of November crude expiration on Friday remains a source of concern. Total stocks of crude and products fell 11.9 mb. Total disappearance of products surged to 21.9 mb compared to 19.7 mb last week, with gasoline demand at 8.9 mb and distillate at 4.4 mb compared to 8.6 mb and 4.4 respectively last week. Overall, the report was constructive given the strong disappearance and sharp decline in stocks.
The test of the 88.00 level basis December crude has achieved our target on the upside. Constructive economic news, tight inventory levels and heightened tension in the Middle East have the potential to push prices higher. Nevertheless, we are cautious of further upside given the uncertain stance of the Saudis regarding the conflict considering the adverse impact it may have on demand. In addition, production levels from non-OPEC members have expanded, particularly in the US, on rising well efficiencies. Setbacks are likely to be limited to the 85.00 area as participants await developments in the conflict.
Natural Gas
After attempting to rally early in the session, the market swung lower to end the day with a loss of 2.3 cents at 3.056 basis November on light volume. Strength continued to be garnered from strong LNG flows, which have exceeded 14 bcf for 7 straight sessions. Increased HDD expectations from overnight forecast revisions also added to the early upside bias, but the fact that most of the cooler changes were in the back half of the 15-day forecasts made the positive effects short lived. Production continues to surprise as it tests the 105 bcf/d area and offsets the positive effects of increased exports. Tomorrow’s storage report is expected to show stocks increased by 80 bcf compared to the 5-year average build of 85. Today’s settlement was just below the 20-day moving average and keeps the near term bias lower. The next target on the downside is the psychological 3-dollar level with support below there near 2.96. A bounce in price will find resistance in the 3.14-3.16 range with a push above there targeting the chart gap at 3.203.
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