Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil gained 65 cents to settle at 78.01. Reports of an additional drone attack by Ukraine against a Rosneft oil installation along with Houthi attacks provided support, but ideas the market might be overbought despite favorable US economic news provided a headwind to values at the higher levels. Reports that Chinese officials asked Iran to help rein in attacks by the Houthis or risk harming business relations also encouraged scattered selling.
The recent gains have violated what we expected would be resistance near the 76.00 area basis March, and the high today at 78.21 exceeded the 100-day moving average at 77.85. The drone attacks by Ukraine, while a concerning development, do not appear to be tightening supplies dramatically given the reports of surplus Russian crude in Asia. If anything, bringing the war to Russian soil might push the public and possibly Putin to rethink Ukrainian strategy, which appears stalled and a drain on their economy and resources. Demand prospects remain questionable given doubts over the Chinese economy and the potential for interest rates and the dollar to remain high. Talk that an extended cease fire is being negotiated in Gaza could be a negative if it comes to fruition. An additional consideration is OPEC+ spare capacity which is at 4.5 mb/d. This has helped soften the potential impact of disruption due to geopolitical risks. As demand growth softens and production outside OPEC+ expands it will weigh on the market even more. With increased exports by Russia to Asia and Africa cutting into OPEC market share, pressure is building to ease off the voluntary output controls currently in force, and discussions will begin on February 1st regarding future production by OPEC+ when the Joint Ministerial Monitoring Committee meets. Subsequently look for consolidation in the 70-76 range basis prompt crude to continue.
Natural Gas
Prices continued to press higher early in the session yesterday, peaking at 2.334 before reversing in the wake of the weekly storage report. The 326 bcf drawdown was above expectations near 321, but trade apparently wanted a larger number as the market retreated over 9 cents soon after the release and ended at 2.18 basis March. Today saw two sided trade early, before reports of an issue at Freeport following last weeks freeze-offs pushed prices to a test of the contract lows. The loss of a refrigeration motor on one of the facilities 3 liquification trains will lead to repairs that could take as long as a month and effect appoximately 20 bcf in flows. The timing could not have been worse for a market that is struggling to find its legs in the midst of an extremely mild winter thus far. The contract lows held up today, and a push below there in the coming week could lead to a probe to 2 dollars. A recovery in prices won’t find much resistance util the 9-day moving avearge currently near 2.28 followed by 2.35.
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