Written Commentary
Price Overview
Heightened geopolitical tension and supply disruptions continue to move petroleum values higher, with WTI and Brent reaching levels not seen since October 2014. Reports that an accidental fire on the Kirkuk-Ceyhan pipeline, which carries crude from Northern Iraq to Turkey for export, attracted additional short covering. The buying interest eased following reports of a resumption of oil flows today but nervousness following attacks yesterday by Houthi rebels against an oil installation in Abu Dhabi, along with continued tension along the Ukrainian border with Russia kept nervousness high over unexpected supply shortfalls. In the background remains the inability of OPEC to hit production targets due to supply chain issues and lack of investment, along with the lack of progress in the Iran nuclear negotiations.
The OPEC monthly report did little to allay concern over the tight supply situation, as it suggested that fear of a large impact from the Omicron variant was likely overstated as they kept forecasts for economic growth and world oil demand generally unchanged from last month at 100.79 mb/d. The supply outlook was also unchanged. The IEA report tried to allay the concern over low stocks by suggesting much needed relief for tight markets is on the way with world oil supply overtaking demand starting in January. On the demand side, the IEA expects Covid-19 to temporarily slow but not upend the recovery in oil demand, while weakness is still expected in international travel. On the supply side, production is expected to continue expanding with the biggest increase occurring in the US, Canada and Brazil while Saudi Arabia and Russia could set records provided OPEC+ cuts are unwound. A replenishment of world stocks on a temporary basis might also occur if major world economies release oil from their Strategic Reserves.
We remain cautious over the potential for further gains despite the supply threats and see the response by producers in and outside OPEC as encouraging. The DOE report will be released tomorrow due to the federal holiday. It is expected to show crude inventories off 1.4 mb, distillates down by 1.3 and gasoline up 2.3. Refinery utilization is expected to be lower by .5 to 87.9 percent.
Natural Gas
After finding an upside bias coming out of the weekend, the market retrenched today with the February contract down 25 cents to 4.031 while the active March lost over 20 cents to settle at 3.845. With LNG feedgas above 13 bcf/d over the weekend and production dropping below 94 bcf/d early in the week, the market appeared to be well supported as below normal forecast were maintained after the holiday. Trade appears to be looking beyond the cold regime that is currently in place, along with the 6-10 day that could bring the coldest temperatures of the season. Focus has turned to early February, which is still indicated below normal but trending warmer in recent revisions. Tomorrow’s storage report is estimated to show a 194 bcf withdrawal compared to the 5-year average decrease of 167. A draw above expectations is likely needed to stave off the downside momentum, as the poor close points to a near term test of the 3.77 area which would mark a 68 percent retracement of the new year rally. Failing there would open the potential for a retest of the December lows. Any support from a large draw or colder forecast revisions will find resistance in the 4.00 area.
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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