Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
WTI crude oil once again failed to follow-through on early strength that carried values up to a high of 74.98 settling off .33 at 73.58 basis February WTI. Early strength appeared to be linked to renewed reports of Houthi attacks on shipping in the Red Sea. The appearance that freight costs are rising as shippers avoid the Red Sea appeared to be seen as a supportive influence early in the session. The weaker tone that developed late appeared to reflect the Angolan decision yesterday to withdraw from OPEC. The African nation which produces 1.1 mb/d of oil, indicated it was displeased over OPEC+ decision to reduce its output target for 2024 and felt the Organization was not serving its interests. The action by Angola has raised fresh doubts over other members’ commitment to the agreement as competition from non-OPEC members such as Guyana, US and Brazil expands on expanding production and takes market share.
Needless to say, the market is still rather cautious on the downside as the prospect for more forceful action by OPEC+ remains as potential support. The establishment of a joint task force by the US and other western powers to shoot down Houthi missiles and drones targeting shipping remains in the background as a limiting factor. How effective the task force will be is up for debate given that the considerable number of vessels traveling the Red Sea precludes the possibility that they would be able to accompany ships but would merely position vessels in areas where they might have the greatest security benefit. The Suez Canal and Red Sea handle near 2.5 mb/d of crude. Whether the problems there expand to involve Iran, who is a major backer of the Houthis, remains to be seen.
The re-test of the 75.00 level and failure against that level today suggests doubts are arising over the commitment of OPEC+ to the voluntary production cuts. Shipping data will likely be closely monitored for how effective the current agreement is at restraining supplies consistent with demand. Nevertheless, the uncertain environment and fears of a broader conflict should limit selloffs despite relatively weaker consumption trends on a seasonal and also outright basis suggesting a more consolidative trend might be apparent into the New Year between 72.00 to 76.00 basis February. Any sign that OPEC+ is taking more coordinated action to support values or the hostilities in the Red Sea are expanding could carry values up toward the 78-79 level.
Natural Gas
Prices managed to regain an upside track following the weekly storage report that showed an 87 bcf stock draw-down compared to estimates near 80. The February contract was up 11 cents yesterday and added another 3.1 cents today to end the week at 2.49. Forecasts added minor upside bias as the expected cooling in early January has remained in place. Background support has been offered by the issues in the Red Sea that have forced the rerouting of ship traffic in the region, which is a major throughfare for LNG tankers. Strong production along with the upcoming holidays, which typically slow industrial demand, have been limiting influences. Monday’s high near 2.51 has held up to tests the last two days, and a push through that area could trigger end-of-year short covering that exaggerates a rally. 2.60 would be the next area of resistance, with 2.80 the target if momentum builds, marking a 38 percent retracement of the recent break. Support comes in near 2.37 and 2.31.
**The Energy Brief will be on hiatus until the new year. Happy Holidays!**
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