Written Commentary
Price Overview
The petroleum complex managed to settle higher across the board for the sixth straight session, with the crude ending up 58 cents at 76.56 basis February while the products were better by 1-2 cents. Support was offered by the weekly DOE inventory report showing stock drawdowns in crude and products that were above estimates, and on comments from Russia that their production would not recover to pre-pandemic levels by May as had been previously suggested. The strength continues to run counter to the increasing cases of the Omicron variant as the market is convinced for now that the effects on demand will be limited.
The DOE report showed crude oil stocks decreasing by 3.6 mb verses expectations near 3.1, with the SPR drawn down by an additional 1.3 mb. Gasoline and distillate stocks were lower by 1.5 and 1.7 mb respectively verses estimated small gains. Production was up .2 to 11.8 mb/d while utilization ticked higher by .1 to 89.7 percent. Total petroleum stocks were down 18.9 mb.
Geopolitical tensions from the Russia/Ukraine situation and Nord Stream 2 delays continue to offer underlying support. The uncertainty compounds current issues with shortages of key inputs and has created questions regarding supply and capital investment as we move into 2022, helping underpin a shift upward in inflationary expectations. The response of OPEC+ at their meeting on January 4th will be watched closely. With values in the cartel’s favored range between 60-80 dollars per barrel, we are doubtful of any significant policy changes. An additional consideration will be China and the level of monetary stimulus they provide their economy in the new year.
Natural Gas
Prices managed to surpass the 4.00 level over the last two sessions but could not hold the gains as the February contract ended 3 cents lower at 3.85. Today was the expiration of the January contract, which added some volatility as it went off the board at 4.024. Trade continues to find buying interest from the colder temperatures expected in the new year. Forecasts have tended to pull the rug out from under the bulls as cooling has stayed in the back half of the 15 day and for the most part failed to materialize, which likely aided the failure above 4.00. Estimates for tomorrow’s storage report are at a 125 bcf drawdown compared to the 5 year average decrease of 121. The 4.00 area remains solid resistance until consistent cold temperatures can settle into the forecast. Support near 3.50 likely holds up with all the risk premium removed from the market over the last 3 months and a large portion of winter still to come.
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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