Written Commentary
Price Overview
The petroleum complex maintained a firm bias despite weakness in US retail sales and reports of an imminent release of strategic reserves. The market continues to focus on production constraints, demand considerations and pressure on the dollar. Ideas that output will continue to lag as OPEC undershoots targets due to supply chain issues and lack of investment limited selling interest. In addition, ideas that demand will not be affected by the Omicron variant as much as previously feared has stoked concerns of further tightness in already low stock levels. A lowering in OPEC capacity estimates by the EIA and Bloomberg by .8 and 1.2 mb/d respectively has led some to revise forecasts toward the 100-dollar level.
Despite the firm tone we remain cautious. A scenario by which prices move up to the 100.00 area would encourage a quicker move to renewables than currently envisioned as the economic incentives toward such a transition increase. On the supply side, challenges to such a run up might also become apparent as producers in the Middle East and Russia take advantage of the higher prices and sharp improvement in profitability. This appears to be progressing in the US despite signals that the industry continues to treat the price recovery cautiously. The rate of oil well completions reportedly rose by 5 percent in what is a typically slow month with the bulk occurring in the Permian. It is unlikely that other areas wont looking to increase output, not only in the US but also globally given the favorable returns. Although reserve releases indicated by China at the beginning of February might not considerably improve supply availability, it could be a psychological impediment to the market. It is also not clear how quickly mobility returns to normal levels, especially if higher gas prices and uncertain infection rates keep large swaths of the population working from home.
The IEA and OPEC monthly reports due for release next week might shed new light on the supply/demand situation, but the trajectory of overall stock levels for crude and products remains a key consideration for the price outlook.
Natural Gas
After the exaggerated rally that flushed out short covering on Wednesday, the market seems to have assessed the current cold temperatures and decided that the risk did not justify the inflated price levels. Most of the gains were given back during yesterday’s trade, with further losses seen early today on light volume as the previous two sessions seemed to wear out trade. The cold expectations into month end have been maintained, although the last few revisions have decreased the severity somewhat while near term temperatures have warmed as well. Yesterday’s storage report showed a 179 bcf withdrawal, which was above estimates, but only offered temporary support as the selloff was already gaining momentum. Talk that the next three storage reports could surpass 200 bcf should offer underlying support along with solid LNG flows bumping up against 13 bcf/d and the continued slow return of production levels after their precipitous drop into the new year. With a close well off the lows the 4.10 area offers initial support on any further weakness, with the 4.00 level likely to hold up into contract expiration. The upside has been cleared out over the last two sessions, with the 4.30-35 area offering some resistance.
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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