Written Commentary
Price Overview
The petroleum complex showed a strong recovery following recent sharp losses. A bounce back in equity values and ideas that yesterday’s breakdown to a low of 37.12 basis December was overdone helped encourage short covering and light bargain hunting in advance of the delayed DOE statistics tomorrow. Given the current stability in production, the main consideration remains underlying global demand trends for gasoline and distillate. Particular emphasis has been placed on Chinese demand which has generally recovered back to pre-pandemic levels as stimulus measures aimed at infrastructure encourage energy usage. A pickup in imports of crude to near record levels has also been apparent as previously booked cargoes purchased at substantially lower prices are offloaded and refined. Nevertheless some troubling signs are beginning to be seen regarding future demand trends. Foremost has been the build in stocks, particularly at independent refiners or “teapots”, where inventories are being reported at 3 times normal levels. In addition, stocks of products in Asia have built up and product margins are weak as demand in other areas such as Vietnam and India remain rather stagnant due to ongoing lock-ins and reduced mobility.
The US also looks rather tenuous and contingent on demand trends. Stock levels for crude remain 18 percent above year ago levels while distillate is as much as 33 percent over, and gasoline at the end of summer is more manageable at 2.3 percent above the comparable period a year ago. Disappearance levels continue to show weakness with gasoline off 16 percent while distillate trends are stronger at only 5.1 percent below year ago, while jet kero implied disappearance is as much as 47 percent below year ago levels. Implied disappearance for all products is standing at 16 percent below the four year average.
A recovery in global demand will be critical to maintaining support near the 38.50 level basis December crude. The market had anticipated a continued improvement in demand and draw in inventory levels when it traded in the 43.00 area, which does not appear to be happening. The recent losses appear to have priced in a less optimistic picture on the demand side and limited draw downs in stock levels going forward. With OPEC+ comfortable at current output levels, any sign that demand is weakening further or that the commitment to the agreement is waning might undercut values to the 35.00 level which might be enough to force action by key producers to realign output with demand levels.
The DOE report tomorrow should shed some light on demand trends. Current expectations point to a decrease in crude stocks of 1.1 mb, a distillate drop of .25 mb and gasoline stocks down by 2.2 mb. Refinery runs are expected to be up 1.1 percent.
Natural Gas
Prices have pulled back considerably since our last brief on September 4th as the October contract lost nearly 19 cents yesterday on continued impressive recovery in production, with follow through pushing it down to a low at 2.328 this morning. We saw a wide range again today before ending the session near unchanged levels at 2.406. Early strength was attributed to a spike in LNG flows, with this mornings 6.3 bcf/d indication well above yesterday’s final number at 5.8 as Sabine Pass appears to finally be ramping back up. This coupled with a drop in production due to transmission issues reported by Dominion Energy had prices trading as much as 8 cents higher early in the session. Prices swung down to the days lows as buying dried up and the short term nature of the production clog gave way to the realization that output has quickly rebounded after the storms, reaching near 89 bcf/d yesterday. Weather continues to be a negative factor as well, and power burns have been running below last year nearly every day thus far in September. The pullback achieved a 38% retracement of the rally since July, which could lead to some near term support to test the 2.50 level. Any further weakness likely finds initial support near 2.30 and beyond that at the 2.25 area which marks a 50% retracement of the rally.
Charts Courtesy of DTN Prophet X, EIA, Reuters.
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