Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil prices gained 62 cents to settle at 76.84, extending yesterday’s strong rally following additional attacks by Ukrainian drones on Russian oil processing facilities, and on ideas that a Gaza ceasefire deal was not likely following Netanyahu’s pledge to continue the war until victory is achieved. With the US becoming more aggressive in recent days against militant positions that pose a threat in the Red Sea, selling was limited against the backdrop of uncertainty. A hardening of the crude backwardation suggested a tighter supply situation was developing as well.
Despite spreads indicating that crude availability has tightened, that may not be the case. Refinery maintenance, which supported the cracks and reduced product inventories, along with a tight diesel situation in Europe have been supportive influences. Nevertheless, stocks of crude are increasing as refinery throughput remains low on continued maintenance. In addition, the drone attacks in Russia have caused a reduction in output of refined products, leading to better availability of crude. The attacks have forced Russia to export more crude in February, potentially undermining its pledge to OPEC to curb sales. Under the deal Russia is expected to cap its crude oil production at 9.5 mb/d and reduce exports by 300 tb/d from the average May-June level. It is unlikely that they will be able to meet these targets as unrefined crude accumulates at refineries damaged by the attacks. Oil exports have already increased from its western ports due to refinery outages, with suggestions that they may rise by 2 percent compared to January. The strength to product markets due to tightening stocks should moderate demand in response to the higher prices, while crude availability increases and provides overhead resistance to prices.
The appearance that crude oil supply availability has not been affected by the conflict in the Middle East along with a continued recovery in US production and low refinery activity due to maintenance should keep supplies ample at a time when demand will be limited into the Chinese New Year, which begins this weekend and ends on February 24th, limiting industrial activity. Prices likely retrench back into the 70-76 range in the absence of any new challenges to crude oil supply availability.
Natural Gas
Another day, another new low. The March contract traded down to 2.817 intraday before settling with a loss of 7 cents at 1.847. Forecast revisions that removed as much as 25 bcf in demand from the 15-day outlook kept downward pressure on values. Yesterday’s storage report showed a 75 bcf withdrawl, increasing total stocks to 248 bcf above the 5-year average and adding to the negative tone. On the weekly charts we tested the lows from September of 2020 at 1.795. Current price levels raise questions regarding if and when production slows and how quickly. To this point there has been no sign of a pullback, with output maintaining the 106 bcf/d area recently. If expected cooling in the second half of the month fails to materialize and production levels hold steady, prices could target the June 2020 lows below 1.50, with 1.80 and 1.60 as support levels on the way down. With RSI nearing 20 percent, a bounce could occur at any time without much ammunition. Any signs that Freeport may be returning to full strength or weather turning colder could flush out short covering, with a move above the 9-day moving average now at 2.015 needed to build upside momentum.
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