Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil and products attracted buying interest following the release of the DOE report. A sharp decline in crude inventories initiated the strength against a backdrop of heightened geopolitical tension and a Chinese stimulus package. Caution was apparent overhead as values gravitated toward the 76.00 area. March crude settled 72 cents higher at 75.09 while gasoline saw minor gains and distillates settled slightly lower.
The DOE report showed crude inventories fell by 9.2 mb compared to expectations for a drop of 2.1. Crude stocks at Cushing fell 2.1 mb to 30.2. A key component of the US crude inventory decline was a drop in production of 1 mb to 12.2 mb, and a sharp pullback in imports to 1.2 mb as unusually cold weather caused freeze-offs and power outages that pushed down refinery utilization by 7.1 percent to 85.5 percent. Due to a sharp draw of 8.7 mb in propane inventories and the crude draw, total stocks of crude and products fell by 22.3 mb. Disappearance rates were at 19.6 compared to 19.9 mb last week while net exports of crude and products surged to 3.6 mb due to the weak import levels of crude.
The market continued to attract overhead selling toward the 76.00 area basis March. Doubts persist over the strength to the Chinese economy. Ideas that the reduction in reserve requirements for banks is not enough and is a stop gap measure to far deeper economic problems. An additional consideration is OPEC+ spare capacity which is at 4.5 mb/d. This has helped soften the potential impact of disruptions due to geopolitical risks. As demand growth softens and production outside OPEC+ expands it will weigh on the market even more. With the expansion of exports by Russia to Asia and Africa cutting into OPEC market share, pressure is certainly building to ease off the voluntary output controls currently in force.
The consolidation in the 70-76 range basis prompt crude is likely to continue. Consensus is emerging that the Fed will step back from a rate cut this month on improving consumer sentiment and economic strength. The 4th quarter GDP report on Thursday might impact this sentiment. Chinese economic uncertainty will persist, and the market will watch for additional supply threats in the Middle East and Russia. Global inventories should build modestly in 2024, limiting upside to the 76 area. Support will emerge in the 68–70-dollar range basis March given potential 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.
Natural Gas
After making another new low yesterday, prices bounced back to fill Monday’s gap, making an intraday high at 2.265 today before settling 9 ½ cents higher at 2.262. Cooling in the back half of the 15-day forecast was credited with causing the turn, but technical buying on the oversold status of the market and short covering likely made up most of the interest. Minor concern with the pace of production recovery aided the move, with early indications today showing output levels just under 104 bcf/d. LNG flows have been quicker to bounce back, reaching above 14 bcf yesterday to offer upside sway. Tomorrow’s storage estimates are pointing to a 321 bcf drawdown, well above the average decrease for this time of year at 148. A higher than expected draw could propel the recovery further, with the 2.35-2.37 range the next target which marks the area where the 9-day moving average and 38 percent retracement of the break since early January are located. A miss on the low side could remind the market of the current mild temperatures and comfortable storage levels, leading to a quick test of the lows near 2.08 and a possible reach to the 2 dollar area.
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