Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil traded firm, ending with a gain of $1.51 at 74.76 basis March following reports of a drone attack by Ukraine against a fuel export and processing terminal 110 miles west of St. Petersburg. The terminal is used to ship oil and gas products. Information regarding the length of time shipments would be impacted were lacking but critical infrastructure facilities were placed on high alert in the Lenigrad region due to the potential for additional attacks by Ukrainian security forces. The move helped drive gasoline sharply higher, with ULSD lagging the move on mild weather forecasts. The attack was the latest in recent days targeting Russian energy facilities and is raising questions regarding the quality of defenses near key infrastructure facilities. Concern over the actions overshadowed reports that protests at the Sharara oil field in Libya had stopped and news that Saudi export levels in Novemebr had expanded to a five-month high at 6.3 mb as sharp declines in the OSP attracted buying.
The drone attacks on Russian soil and other oil infrastructure brings an additional dimension to the global supply equation. Any escalation might provide the basis for increasing risk premium. Whether it will be enough to counter growing concern with the Chinese economy remains to be seen. Erosion in market share for OPEC members on increased production by non-OPEC suppliers and Iran, who is exempt from current production curbs, added background resistance. Of concern to members are altered trade flows and costlier shipments, which in the case of India has curtailed its intake of Middle Eastern crude as a share of its oil imports to the lowest rate ever.
Consensus is emerging that the Fed will step back from a rate cut this month on improving consumer sentiment and economic strength that will be reflected in the 4th quarter GDP report on Thursday. Sentiment is the opposite in China, where talk of rising petrochemical demand has been overshadowed by rising freight rates affecting the cost of goods manufactured and exported.
The consolidation in the 70-76 range basis prompt crude is likely to persist. The market will watch for additional supply threats in the Middle East and now Russia. Inventories should build modestly in 2024, limiting upside to the 76 area. Support will emerge in the 68–70-dollar range basis March given potentail action by OPEC in response to lower prices, the risk premium associated with global tensions and the potential for an acceleration of SPR purchases by the US and other countries at prices below 70.00.
The DOE on Wednesday is expected to show crude inventories lower by 3.0 mb, distillate down 1.2 and gasoline higher by 2.2 mb. Refinery utilization is expected to drop 1.0 to 91.6 percent.
Natural Gas
In what has become a common occurrence, prices gapped lower coming out of the weekend. The March contract dropped by over 8 cents on the overnight open and struggled to find buying interest as the day progressed, ending the session with a loss of 12.7 cents at 2.125. Demand expectations remained weak as forecasts maintained above normal expectations into early February. Additional pressure was offered by output recovery from the cold snap, as it reached above 102 bcf/d over the weekend after dropping as low as 90.5 at the height of freeze-offs last week. The test toward the contract lows at 2.098 and poor close suggest that the coming days will see additional attempts at pushing below that area, with the psychoogical 2 dollar level the next target. Thursday’s storage release could be an inflection point, with estimates pointing to a massive withdrawl in the 324 bcf area compared to the 5-year average of 148. A higher than expected draw could stanch the weakness, with a filling of the overnight gap up to 2.237 the obvious initial recovery level. A miss on the low side could lead to a deeper retrenchment below 2 dollars.
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