Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex failed to follow through on early strength that had pushed values to as high as 87.63, as the May settled with a gain of 32 cents at 86.91. Late weakness to gasoline undercut the rally attempt. The initial strength co reflected a variety of influences, foremost being an attack by Israel on an Iranian consulate in Damascus that killed a number of high level Iranian Revolutionary Guard commanders. Fear that the attack would lead to retaliation and a broadening of the conflict in the Middle East helped encourage buying interest. Drone attacks against Russian refining facilities had also been in focus with reports suggesting that 10-15 percent of refining capacity has been affected. In Mexico, supply problems due to lower domestic production has also been apparent. The country recently cancelled 436 tb/d of oil exports in order to redirect domestic crude production to its Olmeca refinery and ease tightness. On the demand front the US appears to be in good shape given today’s jobs report.
With the market now approaching the next area of resistance in the 88-90 area on May crude, key considerations will likely be whether Russia will reduce their exports to the indicated level of 9 mb/d, along with other members getting into stricter compliance with the agreement, and whether OPEC extends their voluntary output cuts past June. In addition, the global supply and demand response will be watched and in particular whether the US and other non-OPEC members will increase their production, taking market share away from OPEC at a time when demand might also be challenged by the higher prices. The market is looking at a balanced stock situation in crude as we progress through the year and any small movement in the projected supply-demand balance might have an inordinate impact on valuations.
Natural Gas
Early pressure on values reflecting the high storage levels for this time of year and continued restriction of LNG flows at Freeport failed to follow through. Outside strength to equities and other commodity markets and a constructive job report showing continued strength in the US economy helped provide support ahead of the weekend, with the May contract gaining 1.1 cents to settle at 1.785. The rare earthquake in New Jersey provided caution on the downside despite Transco indicating there was no impact on their facilities as evaluations are still underway. Substantial gains will be limited due to the struggles at Freeport that are restricting flows to the sub 13 bcf/d level. Although US production has seen a steady pullback, it has thus far not been enough to sustain rallies in the absence of substantial demand assistance from the weather. The market is likely to be stuck in range-bound trade between 1.70 and 1.90 until opinions begin to form on summer weather trends.
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