Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil continued to falter, falling back 1.54 to settle at 72.28. The weakness was traced to unexpected gains in US employment levels, which pushed back the Fed’s rate cut timeline and strengthened the dollar. Geopolitical concerns were also tempered as potential for a wide-ranging attack by the US on Iran faded and talk of an extended pause in the fighting in Gaza gained ground.
Following the Joint Ministerial Monitoring Committee meeting yesterday, OPEC+ indicated that they will decide in March whether to extend voluntary production cuts. Doubts persist over the effectiveness of current cuts that total 2.2 mb/d. The committee focused on the level of compliance with current output restraints. The Saudis carry the heaviest load at 5.88 mb/d and in a surprise announcement this past week, ordered state oil company ARAMCO to halt its oil capacity expansion plan and target a maximum sustained production capacity of 12 mb/d compared to the earlier target of 13 mb/d. The US, which is outside the agreement, remains the world’s largest producer of crude oil. Although OPEC+ has indicated that the output cuts could continue beyond the first quarter; it appears that some countries are not interested in extending curbs, as their market share continues to erode given the expansion in non-OPEC production.
The Chinese economy as a major weight on the crude oil market. US expansion at the expense of Chinese export markets is limiting the potential for a quick recovery in their global crude oil demand growth. The impact will be particularly notable on OPEC+ members, who are highly dependent on Chinese demand. The possibility of an inventory build in the latter half of the year despite the supply curbs is keeping the market on the defensive. The threat of additional supply cuts should offer support near the 70-dollar area as the potential for an OPEC decision to restrain production remains in the background, along with the potential for OECD countries to use price weakness to rebuild their Strategic Reserves. In addition, Middle East tension and increased drone attacks in Russia could quickly require risk premium to be injected into the market. Look for a consolidative range in the 70-76 area to remain intact at least for now.
Natural Gas
The market continued to probe the downside early in the session, reaching a new intraday low for the fifth straight day before ending with a gain of 2.9 cents at 2.079. Volume was light and the settlment was in the middle of the weeks’ range. Yesterday saw the biggest price move of the week as early strength was erased after the storage report. Like last week, the 197 bcf draw was above expectations, but trade appeared to have been looking for a higher number as prices reversed following the release. The loss of volume at Freeport continues to restrain the markets ability to rally, while potential cooling in the second half of the month offered enough interest to avoid a more substantial break. Forecast revisions over the weekend could decide the near term direction of the market, with a settlement above the 9-day moving average, currently near 2.13, necessary to ignite follow through buying. The slow erosion to new lows has thus far held the psychological 2 dollar level, and if that can be violated the market will find another level of formidable support near 1.94.
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