Written Commentary
Price Overview
Ongoing concerns over the Omicron variant and nervousness ahead of the Fed announcement today pressured values below the 70.00 support area basis January early in the session. Weakness was also attributed to the IEA and OPEC monthly reports suggesting that supply availability should increase as we move through 2022 as OPEC+ and Non-OPEC sources continue to expand. In the background was a larger than expected draw in crude and product inventories in the DOE report which was largely ignored in favor of the macro concerns.
The IEA report released yesterday suggested that global oil production is poised to outpace demand beginning in December as growth in output in the US and OPEC+ countries extend into 2022. The agency indicated that global supply is expected to expand by 6.4 mb/d as the US, Canada and Brazil are poised to pump at their highest ever annual levels. Saudi Arabia and Russia could also hit records if remaining output cuts are fully unwound. Refinery throughput also appears to be recovering strongly, surging by 1.9 mb/d in November and is expected to rise by .7 mb/d in December as margins improve, particularly in China. OECD total industry stocks fell by 21.2 mb as a build in crude oil inventories was more than offset by a decline in product stocks. OECD inventories at the end of October were 8 percent below the average for the 2016-2020 period. For November they are forecast to decline by 23 mb to 2,714 mb.
The DOE report today indicated commercial crude inventories falling by 4.6 mb compared to expectations for an increase, and the draw in the SPR of 2 mb. Gasoline stocks fell modestly by .7 mb while distillate inventories declined by 2.9 mb. Total crude and product stocks were reported to have fallen by 16.9 mb. Domestic oil production continued to be indicated at 11.7 mb while net imports of crude declined to 2.8 mb. Refinery utilization at 89.8 percent was stable while inventories at Cushing rose 1.3 to 32.2 mb.
Given the forecast for production overtaking demand in 2022, inventory levels will continue to be watched closely. In addition, emergency reserve releases will be monitored even though the size and ultimate impact is likely inconsequential to the supply/demand balance. The ability of OPEC to maintain a disciplined approach to production policy given their interest in maintaining a stable price cannot be overlooked, and indications that the US-Iranian talks will be drawn out should continue to provide support near the 70.00 level basis January.
Natural Gas
The market continues to have difficulty maintaining upside momentum as the January contract ended the day 5 1/2 cents higher at 3.802 after trading as much as 18 cents higher early in the session. Cooler revisions to the weather forecasts were the initial catalyst with background support from continued strenght to overseas prices. A drop in LNG loadings offered some resistance as fog issues at Sabine Pass slowed tanker traffic. Indications that wind generation could hit a record high today and offset as much as 10 bcf of gas burn added late selling pressure The December low at 3.63 remains initial support and below there at 3.50. The 4-4.10 range is likely the most that can be expected on a bounce withhout a decidedly colder turn to temperatures. Tomorrow’s storage report is expected to show an 86 bcf withdrawal from storage compared to the 5 year average of 114.
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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