Written Commentary
Price Overview
The petroleum complex focused on the strength to the US and Chinese economies and its impact on demand to attract buying interest. The strength was largely unexpected given the weakening demand situation in India, where COVID-19 infections continue to spike and travel is limited. Nevertheless, the recovery in US airline travel and rising inflationary pressures helped provide a supportive backdrop along with pressure on the dollar as the fed continues to pursue a monetary policy directed at stimulating economic activity. The large infrastructure stimulus package also remains in the background as a supportive factor and the progress at getting the package adopted along with its size will be watched closely.
The demand side has presented a powerful force behind the recent move to the upside. The supply side remains in the background but is posing substantial headwinds and potentially bearish forces that could generate downside movement. Foremost is the OPEC + deal to curb output, which is currently limiting members except Iran, Libya, and Venezuela by as much as 5.6 mb/d with Saudi Arabia accounting for half. Iran is currently producing 2.5 mb compared to as much as 4 mb/d prior to the US withdrawal from the nuclear agreement. Another member who might threaten the balance is Iraq, who’s production has been reduced by close to .8 mb/d. Surprisingly the level of compliance by OPEC+ under the leadership of Saudi Arabia has been high and needs to be watched closely for any signs of cracks. For now, with demand expanding and prices firm, they remain united in the shared purpose of supporting prices, but as we have seen in the past this can unravel quickly, particularly if demand falls short of expectations and cuts into market share. On the upside resistance rests near 67.00 basis June with support toward 62.00.
The DOE report this Wednesday is estimated by Reuters to show a crude stock decrease of 2.2 mb/d, a gasoline draw of .6 and a distillate drop of 1.0. Refinery utilization is expected to expand to the 85.9 percent, which would be an increase of .5 percent.
Natural Gas
The market started the week on a positive note as the June contract gained 3 1/2 cents to settle at 2.966. Colder revisions to forecasts into the first week of May supported the move, and although changes at this time of year have less punch, the slight jump in demand expectations brought out buyers. LNG flows remain robust, coming in at 11.5 bcf today as Asian and European prices continued their rally. On the negative side of the equation was production creeping above 91 bcf/d over the weekend and exports to Mexico dropping below 6 bcf/d. Although the market saw some retrenchment late last week, it remains overbought technically and could see further near-term weakness as we trudge through the shoulder season, with the 2.80 to 2.85 range emerging as support on a pullback. The next target on the upside is the February double top at 3.082, which would likely mark the upper limit of potential for the June contract ahead of its expiration on May 26th.
Charts Courtesy of DTN Prophet X, EIA, Reuters
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