Written Commentary
Price Overview
Concern over the Omicron variant and weakness in equities continued to pressure values, with WTI decisively penetrating support at 70.00 basis February. Selling interest also appeared to be linked to sentiment that the Build Back Better bill was unlikely to pass the Senate given Senator Minchin’s comments this weekend that he could not support the legislation. The fact that additional fiscal stimulus might not be forthcoming at a time when monetary policy is getting more restrictive along with the potential for a return of lockdowns helped foster the decisively bearish tone.
The market ignored what in more stable periods would have been supportive influences. These included OPEC+ compliance rates with production cuts, which rose to 117 percent in November compared to 116 in October. The data continued to show West African producers struggling to pump at targets with Angolan compliance at nearly 300 percent and Nigeria at 239 percent. In addition, Libya National Oil declared force majeure on exports from the Zawia and Mellitah oil terminals due to a disruption to production by the Petroleum Facilities Guard at the Sharara and Wafa oilfields. The weakness in the petroleum complex also ignored strength to natural gas prices in Europe as Russian supplies continue to tighten and weather turns colder at a time when wind power output has been lower than normal and nuclear generation in France has been reduced due to unplanned outages.
Today’s breakdown suggests a more cautious tone for values. We still see OPEC+ as a bullish influence and suspect that downside support will eventually evolve at lower levels as speculation builds that Russia and Saudi Arabia will take appropriate action to support values above the 60.00 area basis February WTI. The speculation should help uncover support on further setbacks to the 63.50-65.00 area.
The DOE report Wednesday will be watched closely given low inventory levels. It is expected to show crude inventories falling by 2.6 mb, distillates up .2 and gasoline increasing by 1.1 mb. Refinery utilization is expected up .7 to 89.8 percent.
Natural Gas
The market found support today despite somewhat negative weather revisions as the February contract gained 12 cents to settle at 3.758. The 15 day forecast lost signifcant HDD’s in the front half of the outlook, but trade seemed to focus on the back end where signs emerged that the beginning of January could see below normal temperatures for the first time this winter. Spillover strenght was also garnered from European LNG prices, which surged nearly 10 percent as Russian flows into Germany slowed considerably and geopolitical tensisons remained high. US LNG flows hit 13 bcf/d over the weekend and added to the positive tilt on the day. The close just above the 9 day moving average for the first time this month is a positive sign, but the market still has to digest what is expected to be a very negative storage number this week. Coupled with the near-term warmer temps, the 4.00 level likely holds up to any further strength until a clearer picture of the early January cooling comes into view. With all the risk premium out of the market the 3.50 level looks like solid support with a large portion of winter still ahead.
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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