Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex traded mixed with crude attracting scattered buying while products continued to lag the move upward, particularly in ULSD. Weakness in Asian margins continued due to excess supplies, with the 2-oil crack falling by 28 percent and gasoline margins declining by 23 percent so far this month. The weakness has led to an effort by some refiners to raise gasoline and cut diesel output, reflecting adequate gasoil supplies in Europe following a modest winter and hopes for a pick-up in travel this summer that would benefit gasoline.
The steady tone in crude oil reflected the EIA report, which suggested that recently announced output cuts by OPEC+ might exacerbate an oil supply deficit expected in the second half of the year and hurt consumers and the global economic recovery, particularly if inflationary pressures build and reinforce further tightening in monetary policy by central banks. Countering the bullish bias was the International Energy Agency (IEA) stating that crude oil availability from Russia has exceeded expectations, with March exports hitting their highest level since April of 2020.
Key insights from the IEA report included:
- World oil demand in 2023 is likely to increase by 2 mb/d to a record 101.9 mb/d. The largest growth will occur in non-OECD countries, with China expected to account for 90 percent of the growth. OECD demand is likely to be dragged down by stagnant industrial demand.
- The extra cuts by OPEC+ are expected to push world oil supply down by 400 tb/d. In 2023, world oil supply growth is expected to slow to 1.2 mb/d compared to 4.6 mb/d in 2022 with further expansion in the US and Brazil.
- After holding steady in February, global inventories have shown a hefty decline of 38.9 mb during March in the US, Europe, and Japan.
We still look for some consolidation in values to transpire near current levels as the market assesses demand prospects and Russian availability. Additional sales from the US SPR, which totaled 1.6 mb in the latest DOE report and are Congressionally mandated to reach as much as 25 mb, might weigh on values near term but are unlikely to significantly ease the global imbalance expected later this year. Pullbacks will likely be limited as a tighter inventory situation becomes apparent into the summer, with upside potential toward 91.00 basis prompt crude. Good support is likely in the 77.00-78.00 area.
Natural Gas
The 2 dollar level was taken out today as the May contract probed down to an intraday low at 1.946. Follow-through was lacking as the market trended higher for the remainder of the session, ending with a gain of 10.7 cents at 2.114. The buying appeared to be profit taking ahead of the weekend as the fundamental picture remains tilted to the negative side. Trade may be looking to expected production losses for shoulder season pipeline maintenance, although they have not materialized yet as output is hovering near 100 bcf/d. Coupled with LNG flows reaching record levels on multiple occasions over the last few weeks, an output drop could be enough to put some distance in from the lows if fund short covering can be flushed out. Yesterday’s storage report showed a 25 bcf injection, below estimates at 28, but it was unable to roust any buying interest as it still increased overall storage, which is currently 19 percent above the 5-year average. The settlement above the 9-day moving average is a short term positive signal with the next resistance level at the 20-day moving average near 2.20. A settlement through there would signal a chance for the rally to extend and flush out fund short covering. Although the 2-dollar level was violated today, it remains as key support on a settlement basis, with the 1.80 area the next target below there.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The information and comments contained herein is provided by ADMIS and in no way should be construed to be information provided by ADM. The author of this report did not have a financial interest in any of the contracts discussed in this report at the time the report was prepared. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.
