Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil was on the defensive in early morning trade, reaching a low of 70.62 basis March before attracting buying interest and settling lower by 4 cents at 72.48. Early selling reflected a sluggish economy in China, where GDP grew at 5.2 percent in the fourth quarter, slightly below expectations. In the background was recent strength to the dollar reflecting fear that the US Federal Reserve will move slowly toward lowering interest rates due to ongoing strength in the US economy. The gasoline crack spreads attracted modest support on potential for seasonal refinery maintenance to begin and help reduce output of gasoline in the next few months. Forecasts for above normal temperatures limited a recovery in 2-oil prices and margins.
China remains a key focus for the market. Oil refinery throughput in 2023 rose 9.3 percent to a record as new plants came online and bolstered production to meet a post pandemic recovery in fuel demand. They also took advantage of discounted fuel to export to other destinations in Asia where stocks were low. In their monthly report, OPEC continues to maintain optimistic forecasts for demand, with growth of 2.25 million mb/d expected in 2024 and an increase of 1.85 mb/d in 2025. Concerns over demand potential in China remain given declines in population, weak retail sales and issues in the property sector. Chinese authorities have thus far been slow to provide additional stimulus.
The market will watch for additional supply threats in the Middle East, but the concerns have moderated given that no key production areas have been threatened and questions persist over OPEC’s commitment to support prices amid concerns over demand. Production growth in areas outside of OPEC+ are also providing a headwind to values. Look for inventories to build modestly in 2024, limiting upside to the 76 area. Support should continue to emerge in the 68–70-dollar range basis March given the curtailed production in Libya. possible action by OPEC in response to lower prices, the risk premium associated with Middle East tensions and the potential for an acceleration of SPR purchases by the US.
The DOE report to be released tomorrow is expected to show crude inventories fell .3 mb, distillate higher by .9 and gasoline gaining 2.2 mb. Refinery utilization is expected to drop .6 to 92.3 percent.
Natural Gas
Prices pulled back significantly to start the week, losing over 41 cents yesterday and trading as low as 2.756 today before ending the session 3 cents lower at 2.87. The move retraced over 50 percent of the rally since mid-December. Forecast revisions coming out of the weekend pointed to significant warming into the end of January that weakened the resolve of bulls. Production, which bottomed near 90.5 bcf/d yesterday, was also twisted into a negative as the drop was not as proportionally severe compared to other winter weather events of the past few years. LNG flows also dipped with supplies shunted internally as cash prices spiked with the weather, adding fodder to the pullback. Tomorrow’s storage draw is expected near 164 bcf compared to the 5-year average at 126. With next weeks pull also expected to be large, any high side misses could help prevent further weakness. The market ended well off the lows today despite the recent selling pressure. A continuation of the recovery initially targets the psychological 3 dollar level, which also marks the current 9-day moving average. A settlement above there could portend another run at the 100-day moving average near 3.22 and a possible retest of the highs. Support levels mentioned late last week were all violated on the selloff, with today’s low near 2.75 marking initial support, followed by the 2.68-2.70 range which is a key area. A settlement below there could open up the possibility of a return to the December lows.
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