Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil continued to lack follow through above the 78.00 area as weakness to the Chinese economy remained apparent and pressured values to settle lower by 1.97 at 75.85 basis March. Chinese manufacturing activity contracted, with the Purchasing Manager’s Index rising to 49.2 in January from 49 in December, with figures below 50 denoting contraction. Ideas that factories will shut earlier than expected for the Lunar New Year on February 10th remain in the background as additional drag on the economy. Weak external demand was apparent, with new export orders contracting for the 10th straight month. To spur growth, China’s central Bank cut reserve requirements, but questions remain over its effectiveness at revitalizing the economy given the property downturn, local government debt, deflationary pressures, and weak global demand. Although it appears the service sector has rebounded and the World Bank has revised their growth forecasts upward to 4.6 percent due to fiscal support, questions remain over whether it is enough to impact oil demand. With growth expected to slow to 4.6 percent in 2024 from 5.2 percent in 2023, headwinds to oil demand growth remain. The US Fed move to keep rates unchanged was expected.
The DOE report failed to offer much upside encouragement. Crude oil inventories increased 1.2 mb compared to expectations for a decline of .9. Cushing inventories fell to 28.1 mb verses 30.1 last week. Gasoline inventories rose 1.2 mb while distillate fell 2.5. Total stocks of crude and products fell by 9.6 mb as propane stocks fell 5.3. Refinery utilization remained lower than expected at 82.9 against 85.8 percent last week. Domestic crude production recovered from weather induced losses, rising to 13.0 mb from 12.3 last week. Disappearance levels were 20.1 mb compared to 19.6, with gasoline disappearance at 8.1 mb compared to 8.5 last year. Net exports of crude and products totaled 2.5 mb.
Today’s reversal was in the face of Middle East tensions, which has been the underlying supportive factor. The rebuilding of US inventories will continue as refinery maintenance restrains throughput at a time when US crude production should also recover. OPEC is a wild card with spare capacity at 4.5 mb/d. This has helped soften the impact of disruptions due to geopolitical factors. How aggressive the US response will be to ongoing attacks remains in the background along with the impact of recent drone strikes against Russian oil facilities and their impact on availability. Sluggish Chinese demand, along with the possibility that voluntary cuts will be eased in April, make a consolidation in the 70-76 range basis March possible once again.
Natural Gas
Despite probing to new lows the last two sessions, the market managed to close higher each day, ending with a gain of 2.3 cents today at 2.10. The recovery lacked any major fundamental driver as forecasts remain well above normal through the first half of February. Longer term outlooks that pointed to the potential for cooler temperatures in the second half of the month were credited with stirring up buying interest, but overall the market currently lacks an upside driver. The next chance for volatility will come with tomorrow’s storage report which is expected to show a 194 bcf withdrawl that would be above the average pull of 185. The bounce today tested the 9-day moving average at 2.157. That level now marks initial resistance, with a settlement above there necessary to spark technical buying interest. The 2-dollar level remains initial support, and a push below there will find substantial support near 1.94.
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