Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex attracted good buying interest as the market focused on Fed policy and ideas a favorable CPI report later this week might continue to weaken the dollar as expectations of a tighter fed policy fades. Confidence also came from signs the Chinese economy was on the road to recovery following this weekend’s announcement that they are reopening their borders for the first time in three years, and on forecasts for a doubling in passenger traffic compared to last year during the Chinese Lunar New Year holiday that begins on Jan 22nd. The potential for stronger demand in China gained further traction from the release of an addition to crude import quotas for independent refiners of 111 million metric tonnes of crude, over double what they were at this time last year, while also allowing refiners to export additional products by increasing export quotas as well. Although the outlook for Chinese demand looks favorable, in the background remains skepticism that a return to normalcy will occur. In addition, reports of an expansion in Norwegian output along with the rejection of initial bids to resupply the Strategic Petroleum Reserve by the DOE provided some uncertainty over supply availability.
Expect consolidative price action with resistance near 77.00 basis February and support at the 70.50 level. Supply availability has improved in Europe and Asia as reflected by increases in product inventories and a reduction in the OSP by Saudi Arabia for February deliveries in Asia. Russian availability to China and India, who are not a party to the price cap by G-7 members, has been higher than expected. In addition, moderate temperatures in Europe and the US and a decline in manufacturing activity has undercut demand for middle distillates. Chinese demand remains key to the markets ability to break out on the upside.
The DOE report on Wednesday is expected to show crude stocks lower by 2.4 mb, distillates off by .1 and gasoline up 1.5 mb. Refinery utilization is estimated to be up 6.1 percent to 85.7. A recovery in disappearance following a normalization in weather conditions is expected.
Natural Gas
The market finally found some support, albeit tepid, as we came out of the weekend with the February trading 20 cents higher overnight. Prices tested above 4 dollars to an intraday high at 4.128 before pulling back to end with a gain of 20 cents at 3.91. Weather models were not drastically revised, but the potential for cooling in the longer-term forecasts into late January and early February ignited buying interest into mid-session. Some spillover from the petroleum complex and the positive signs out of China was seen, but for the most part strength was driven by short covering. Production remains firmly above 98 bcf/d, and with Freeport silent the weather will remain our leading indicator for the time being. Upside follow-through will find initial resistance near the 9-day moving average at 4.26, and beyond there 4.80 would be the next target marking a 38 percent retracement of the break since mid-December. The 3.50 level remains key support, with a failure there likely leading to a test of 3 dollars.
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