Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
Growing fears over the availability of Russian crude to the global market has helped underpin values in recent days. Forecasts that Russian production will fall as much as 17 percent due to Western sanctions and their impact on investment has supported these fears. In addition, it is becoming increasingly apparent that Russia is having difficulty finding ship charterers to move their oil, particularly by VLCCs at a steadily increasing cost. This has led to record high discounts for Russian oil to competing grades, reaching over 36.00 per barrel. Although some countries such as China and India continue to show interest in Russian oil, it has been increasingly difficult to move as pipelines reach capacity and ship brokers and insurers remain fearful of violating the sanctions imposed by many Western powers. The dispute with some European governments and Russia, who recently demanded payment in Rubles, has also muddied the waters and is raising fears that a total embargo on oil and possibly natural gas might be forthcoming Although concerns over global growth remain given lockdowns in China and the rise in interest rates, the contraction in demand is unlikely to be enough to offset the reduction in Russian supplies, leading to a further drawdown in historically low inventories.
Help from other OPEC+ members to compensate for the lost Russian barrels is unlikely, with sources indicating the producer group will stick by the existing deal and agree to a small output increase in June when they meet on May 5th. The group is already struggling to produce at agreed levels with output as much as 1.45 mb/d below their current targets. There could be further shortfalls due to challenges to production in areas other than the UAE and Saudi Arabia on material shortages, such as pipe, and on lagging capital investment.
We still see the potential for values to recover toward the 115 area on WTI in the absence of any change in OPEC policy or an agreement to lift sanctions against Iran. The best chance at reducing demand might come from higher product prices as margins continue to expand relative to crude.
Natural Gas
Prices have gyrated over the last two sessions, with a loss of 45 cents yesterday followed up by a rebound of 36 cents today as the June ended the week at 7.244. Spillover from overseas price weakness pressured values yesterday, as Russian gas continued to flow West despite tensions over payment in rubles. The storage report added selling pressure, as the 40 bcf build was construed bearishly despite it bringing total stocks back to more than a 300 bcf deficit to the 5 year average. The underlying driver of price strength contines to be US production levels, as the slowdown from last weekends late season blizzard conditions in the Bakken region shut in more gas at a time when output had already been floundering verses expectations. LNG flows remain inconsistent, dropping below 12 bcf yesterday, but all signs point to a return to full capacity this summer after maintenance is complete. The 7.50 level remains initial resistance, with not much beyond there to slow a rally until the 8 dollar area. Any pullbacks should find considerable support near 6.80, and if that doesn’t hold the market could test all the way down to 6.50.
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