Written Commentary
Price Overview
The petroleum complex traded on both sides of unchanged before settling slightly lower as the market appeared to accept the OPEC monthly report suggesting the Omicron variant will have a brief and mild impact. They also expect oil demand to average 99.13 million barrels in the first quarter of 2022, up 1.11 mb/d from their November forecast. Expectations that some of the recovery in demand during the fourth quarter has shifted to the first quarter followed by a steadier recovery in the remainder of next year accounted for the revision and suggests a more moderate increase in inventories during that period than had been forecast. The idea that the Omicron variant would not be as crippling as previously feared was also expressed given the appearance the world is better equipped to manage COVID-19 and its related challenges. The report also maintained world oil demand growth of 4.15 mb/d in 2022. On the supply side, the report showed higher production as OPEC+ gradually unwinds output cuts in place since last year. The report showed OPEC output has risen by 290 tb/d to 27.72 in November led by increases from Saudi Arabia and Iraq. They left their forecast for growth in US shale output at 600 tb/d in 2022, largely unchanged from the previous estimates, while non-OPEC supply is projected to see fast growth of 3.0 mb/d over 2021 with the US and Russia accounting for two-thirds of the increase.
Underlying support continues to be evident on impressions that indirect US-Iranian talks are facing obstacles as Iran maintains an uncompromising stance despite entreaties from Germany to soften their hardline posture. Tensions between Russia and Western powers remain high and have helped raise concern over the availability of natural gas if the Nord Stream project continues to experience delays due to political concerns and heightened aggression from Russia towards Ukraine. Offsetting these considerations are uncertain growth prospects in China, where energy supply shortages have eased, and inflationary pressures have stabilized for now.
The more optimistic outlook for the global economy and increased geopolitical tensions should limit downside pressure to the 70.00 level notwithstanding unexpected surprises on the Covid front. Additional clarity on supply/demand prospects should be forthcoming tomorrow when the IEA Monthly Report is released.
Natural Gas
The chart gap from last Monday was filled early in the session as the January contract made an intraday high at 4.085 before running out of steam as the session wore on to settle 12.8 cents lower at 3.761. Cooler revisions to the weather forecasts supported prices with an increase of as much as 21 bcf in demand as colder temperatures are expected for the Northern US in the 6-10 day period. Spillover strength was also garnered from European gas prices which surpassed recent highs on cooling temperatures and increased geopolitical risk from the Russia/Ukraine situation. The rally lost momentum after the chart gap was filled as technical buying dried up and trade digested the fact that the cooler forecasts were only pointing to a normalization of temperatures, with a return to above normal levels expected in the back end of the outlook. Early estimates for Thursday’s storage report are at an 86 bcf draw compared to the average at this time of year at 114. The following two weeks are expected to come in below average as well, with the potential for overall storage to come in line with the 5 year average by the end of December, which added overhead resistance. With today’s reversal the January contract is within 15 cents of the recent lows at 3.63, which is likely the next downside target with support underneath there at 3.50. The 4.10 level should offer initial resistance if temperatures can trend cooler.
The authors of this piece do not currently maintain positions in the commodities mentioned within this report.
Charts Courtesy of DTN Prophet X, EIA, Reuters
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