Energy Brief for Dec 1.23
by market analysts Stephen Platt and Mike McElroy
The petroleum complex traded under pressure, losing 1.89 to settle at 74.07 basis January. The weakness reflected nervousness over the viability of the OPEC+ agreement reached yesterday. The new deal saw an expansion of voluntary production cuts to 2.2 mb/d from 1.3 previously, with Saudi Arabia and Russia rolling over their cuts from December, and other members signaling additional voluntary cuts of 900 tb/d. These included cuts of 163 tb/d by the UAE, with Iraq and Kuwait at 223 and 135 tb/d, respectively. Saudi Arabia, Russia the UAR, Iraq, Kuwait, Kazakhstan, and Algeria were among producers who indicated their cuts will be unwound gradually after the first quarter, market conditions permitting.
Given that the agreed restraint in early 2024 is voluntary, the market is questioning whether the producers will follow-through on their pledges. In addition, the agreement suggests that the Saudi’s are unwilling to cut further without stronger support from other members.
The uncertainty over adherence to the agreement is likely to weigh on the market. Output levels are beginning to recover in smaller producing areas such as Nigeria as tightness in supply chains eases, which will be a consideration as they decide whether to adhere to original production targets. In addition, the crude market is facing headwinds from uncertainty over global demand and the potential for output increases from non-OPEC producers such as Brazil, the US, Guyana, and Canada. Brazil indicated that they will become a non-participating member of OPEC in June. Demand news from China was favorable with the Caixin PMI report showing factory activity expanded in November, driven by rising orders, rising to 50.7 from 49.5 in October and the fastest expansion in 3 months. Nevertheless, uncertainty persists given the weakness in the property sector and export levels.
Today’s breakdown reflects the uncertainty over whether OPEC producers can manage production levels consistent with demand. The failure to reach a solid agreement and instead fall back to voluntary cuts suggests OPEC+ might be in disarray, and further downward pressure toward the 70.00 area basis January could be necessary to pressure them to take more concrete actions, which will fall on the larger Middle East producers if they occur.
The natural gas market spent the second half of the week in a very tight range, closing at 2.814 for a gain of 1.2 cents today. The weekly storage report released yesterday showed a 10 bcf build in stocks against expectations for a draw of 12, leaving overall inventories 8.6 percent above the 5-year averge. The market reacted by selling off to the session low at 2.761 after the release but it could not achieve another contract low. The 2.75 level is the last line of defense on a settlement basis to avoid a drop to the 2.50 area. The market is oversold, with the RSI remaining below 20 percent since Wednesday, so any sign of recovery could trigger short covering and technical trade that would amplify a rally, with the 9-day near 2.92 offering initial resistance followed by 3 dollars.
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