Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex continues to trade defensively as the production cut by the Saudis is offset by global economic concerns tied to the potential for further increases in interest rates and a sluggish recovery in China. Rumors yesterday that the US and Iran were close to another agreement on nuclear proliferation were denied by both countries, helping provide some underlying support following the sharp downside move to as low as 69.03 basis July.
We are still unconvinced that economic concerns are as dire as suggested given the recent weakness in the dollar along with the strength in equity values. However, headwinds to the energy markets persist, tied to the higher than expected supplies from Russia, Iran and Venezuela, expanding production in non-OPEC countries and uncertainty with Chinese and US demand due to weakness in the manufacturing sectors. In addition, the unexpected build of products, and particularly distillates, in the most recent DOE report does reflect some spillover from the weakness in the US manufacturing sector at a time when gasoline disappearance is holding its own but should build into summer. Chinese consumption levels are also being questioned as export demand remains weak and domestic consumption sluggish leading to a build in inventories.
Despite these concerns, we still look for the market to grow increasingly tighter as global stocks decline. The possibility that the Chinese government will inject additional stimulus given the sluggish recovery along with the reduction in OPEC production levels should underpin values and provide the basis for a move back toward the 76.00 level. The extension of the Saudi production cut past July will be a primary consideration. A move down through the lows established yesterday would renew doubts over the prospect for a near-term price recovery.
Natural Gas
After a fifth straight day of gains on Thursday, the market took a step back today, losing 9.6 cents to settle at 2.254. The weekly storage report was the first damper to the rally, as the 118 bcf build after reclassifications was well above expectations near 113, and reminded the market of the current substantial supply overhang. Forecast revisions this morning showed a minor downward revision in CDD expectations, further dampening the mood and flushing out some profit taking on very light volume. The market managed to settle just below the 9-day moving, making the lows at 2.136 the next support level, and failing there 2 dollars becomes the target. The 20-day moving average near 2.416 is the first level of resistance. With LNG maintenance continuing, it will be difficult for the market to push much beyond that level near term unless warmer forecasts develop.
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