Written Commentary
Price Overview
The petroleum complex recovered from steep losses yesterday to close sharply higher. Reports of progress in the Iranian Nuclear talks had weighed on values, but continuing expectations for demand to recover markedly as we move into summer as spending and travel increases in Europe and the US supported prices.
In addition, ideas that OPEC will move cautiously in maintaining supply balance in the months ahead might have been prompted by a report by the IEA suggesting investors should not fund new oil projects if the world is to reach zero emissions, which raised the scope for developing tension between OPEC and the IEA. In an internal briefing document, the cartel criticized the recommendation on the grounds that “the claim that no new oil and gas investments are needed post-2021 stands in stark contrast with conclusions in other IEA reports and could be a source of instability.” In addition, the suggestion that investment decisions need to be rolled back could affect strategic decisions that might affect capital investment just as demand is beginning to recover. Although the report’s impact is likely long term, it does provide a stronger incentive for OPEC to maintain control over the market as they approach the June 1st Ministerial meeting.
Nervousness ahead of that meeting should confine values in a trading range between the 62.00 and the 66.00 area basis July WTI. Comments ahead of the meeting regarding OPEC+ policy, the compliance level of current members, and the Iranian negotiations will be watched closely next week.
Natural Gas
Prices continued to give up ground over the last two sessions with the July trading as low as 2.962 today before settling just over a penny lower at 2.977. Yesterday’s storage report sparked the additional selling as the 71 bcf injection was above expectations in the 60 area. Despite the missed estimates the build was below average for this time of year, while total stocks at 2,100 bcf are 4% below the 5 year average. A recovery in production levels in the second half of the week to near 91 bcf/d added to the weakness, while LNG loadings offered support as they appear to be bouncing back after a recent slowing, as early indications today were at 11.2 bcf. The NOAA released expectations for this summer’s hurricane season yesterday, suggesting a 60 percent chance of above normal hurricane activity. This likely starts to add volatility as trade begins to mull over all the things that could go wrong, or right, this summer after the multitude of issues seen last year. We continue to expect prices to recover while the early warm up in temperatures unfolds as we finish up May. The market achieved a 38 percent retracement of the April/May rally yesterday, and any further weakness likely finds support at the bottom of our recent range near 2.93. Initial resistance should emerge in the 3.05 area as prices rebound.
Charts Courtesy of DTN Prophet X, EIA, Reuters
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