Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil prices saw strong initial gains in response to news that the US and Britain had conducted air and sea strikes on Houthi military targets in Yemen. The widening of the conflict led to active buying which carried values up to as high as 75.25 before resistance developed, with the February contract ending the day 66 cents higher at 72.68. The strength was understandable given the impact recent Houthi attacks have had on shipping in the Red Sea and fears any halt of flows around the Straits of Hormuz might have on oil markets. In addition, concerns were heightened by an Iranian seizure of a tanker carrying Iraqi crude destined for Turkey and the potential that it might foreshadow their increased involvement in the conflict.
Although concerns of a widening of the conflict is foremost on many traders’ minds going into the weekend, the attack on Houthi targets is not surprising and should facilitate active and forceful negotiations among all parties involved, including those affected economically by the conflict.
The market will watch for additional supply threats in the Middle East but remain cautious due to questions about the ability of OPEC+ to further support prices and on the appearance that demand growth will continue to soften, particularly in China, as EVs gain a larger market share. Production growth in areas outside of OPEC+ will also provide a headwind to values. Stocks look poised to build modestly in 2024, limiting upside to the 76 area. Support will surface in the 68–70 range basis February given the force majeure in Libya at the Sharara field, possible action by OPEC in response to lower prices, the risk premium associated with Middle East tensions and the potential for larger SPR purchases by the US.
Natural Gas
With much of the US engulfed in major winter storms, prices have pushed higher over the last two sessions to end the week at 3.313 basis February. The arctic blast, which will reach its peak this weekend and effect a large swath of the country into early next week, could lead to a significant spike in demand as well as corresponding production slowdowns. Output has already dropped to the 105 bcf/d area from near 108 at the start of the year, and will likely see further decreases in the coming days. Yesterday’s storage report showed a 140 bcf drawdown, well above estimates near 119, which helped support an already firm bias and could signal a trend of above average draws in the coming weeks. The 100-day moving average near 3.24 was exceeded with today’s settlement, and the next upside target could be the chart gap from early November at 3.681. The 100-day moving average now becomes initial support, followed by 3 dollars and then the 9-day moving average currently at 2.95.
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