Written Commentary
Price Overview
The petroleum complex traded higher on tension between Russia and the Ukraine and reports that Saudi Arabia is looking to increase official selling prices for March on better demand and improved margins. Reports that the US had awarded a 13-million-barrel exchange from the Strategic Reserve appeared to have little impact, but the possibility for further releases remains with China expecting to release some reserves ahead of the Lunar New Year on February 1st.
The release of the DOE report appeared to do little to change bullish sentiment as disappearance levels remain strong. Total disappearance was reported at 22.4 mb, up over 11 percent against last year as gasoline and distillate continue to show strong rates. Inventory levels showed commercial crude up 2.4 mb, with 1.3 mb withdrawn from the SPR. In gasoline stocks rose 1.3 while distillate fell 2.8 mb. Total petroleum stocks excluding the SPR fell 4.1 mb. Refinery utilization was 87.7 percent compared to 88.1 percent in the prior week.
Prospects that the Federal Reserve will continue to tighten monetary policy in reaction to heightened inflationary pressures should help moderate movement to the upside. Concurrent dollar strength has also injected uncertainty over demand trends outside the US if the upward trend in the dollar reasserts itself in response to a tighter monetary policy and raises petroleum prices in domestic currencies.
Despite the strength today which saw Brent reach above 90.00, we still feel the market is vulnerable to downside price pressures. A war between the Ukraine and Russia is far from certain. The appearance that demand is approaching pre-Covid levels provides an environment by which Middle East producers might opt to increase output levels and market share, which would limit the impact that higher prices might have on demand and likewise discourage the expansion in output levels outside of OPEC+. Nevertheless, some caution is needed given the political situation and the strong upside trend that has yet to be broken.
Natural Gas
The market rallied on improved demand expectations as overnight weather revisions turned colder. The Euro and American models trended toward agreement, with the main changes coming in the 11-15 day period as the Euro model added around 45 bcf of demand overall. On the way up the March contract was only slowed briefly by the 4.00 level, trading as high as 4.194 early in the session before ending the day 14 cents higher at 4.036. Geopolitical tensions between Russia and the Ukraine saw little change and became a background concern for the moment. LNG flows remain steady near 13 bcf/d while production has also become somewhat steady in the 94 bcf area. Prices backed off from the early euphoria as the next few days will offer some relief from recent extreme cold, and the unreliability of the back end of forecasts was reconsidered. Estimates for tomorrow’s storage report are in the 216 bcf area compared to the 5-year average draw of 161. The overnight revisions reminded trade that there is still a substantial amount of winter left, and as seen last year, anything can happen. The temperature trend into mid-February will be watched closely in the next few updates as forecast reliability increases. Any further strength will find initial resistance in the 4.25 area, with 4.00 now becoming support on any retrenchment.
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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