Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex saw sharp early losses, with the June crude falling to a low of 100.28 before recovering strongly and settling over 105.00. The early weakness reflected growing concern over Chinese economic prospects following the release of their Purchasing Managers Index on Saturday. The index contracted at a steeper than expected pace of 47.4 in April from 49.5 in March as widespread COVID-19 lockdowns halted industrial production and disrupted supply chains, raising fears of an economic slowdown in the second quarter which could weigh on global growth. Ideas that the pace of contraction in China will slow as the pandemic comes under control, along with additional stimulus by the Chinese central bank appeared to encourage bargain hunting at the lower levels, with short covering developing on ideas Europe is still considering further reductions in Russian oil imports if not an outright halt. The potential for this to exacerbate current supply tightness as exports of crude and products expand at the expense of the US domestic market also appeared to attract buying interest on the setback.
As a consequence of Russia’s invasion of Ukraine, the United States has become a net exporter of petroleum as product exports expanded to record levels in recent weeks while crude imports have fallen. In April, the US was a net exporter of 1.4 mb/d of crude and products which is a sharp turnaround from the net imports of .4 mb/d in December of 2021 prior to the invasion. Subsequently inventories continue to decline with crude at Cushing now at its lowest levels since 2014 and before then 2008. With OPEC oil output rising by only 40 tb/d in April compared to the increase agreed to of 400 tb/d, doubts over the ability of the US to supplement global supplies is being questioned. With OPEC unlikely to raise output significantly at their meeting on May 5th further tightness in US supply availability to the global market appears inevitable despite the withdrawals from the SPR. With prices for diesel continuing to surge faster than crude, further policy action might be considered, including export restrictions.
We still see the potential for values to recover toward the 115 area on WTI in the absence of any change in OPEC policy or an agreement to lift sanctions against Iran. The best chance at reducing demand might come from higher product prices as margins continue to expand relative to crude.
Natural Gas
The market traded firm coming out of the weekend, with prices testing the 7.50 level intraday before ending the session with a gain of 23 cents at 7.475. Fundamentals were positive leaning across the board, although not enough to justify the size of the move. Total degree days increased from Friday’s forecasts, production downticked from weekend levels although showing improvement after last weeks losses, and LNG flows saw a small increase to 12.2 bcf/d. With long term forecasts pointing to a hot summer, the concerns about output continued to support an upside bias to trade, and with an emergency meeting of the EU today to discuss whether payments to Russia in Rubles would breach sanctions, the market had enough reasons to press the upside. 7.50 remains an important level, with a settlement through there likely leading to a test of 8 dollars and the mid-April highs.
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