Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex settled higher despite sharp early losses linked to the pickup in Covid cases in China along with protests there against the zero Covid policy, which raised concerns over economic prospects along with the potential for political instability longer term. How the Chinese government reacts to the protests will be a key question for the energy markets given they are the largest oil importer, and a key ally of Russia and an important buyer of their crude amid sanctions by the West.
The sharp decline in crude values could not be maintained and values rallied strongly from the low of 73.60 basis January during the US session. The recovery was based on ideas downside potential would be limited by the potential for US purchases near 70 dollars to refill the SPR, and on concern that supplies might tighten once a European ban on Russian crude imports and a price cap goes into effect on December 5th.
The strong recovery could attract follow-through depending on how OPEC+ approaches their meeting on Dec 4th. Further cutbacks in production targets, despite reports early last week of production increases, will be clouded by the prospects for Chinese demand and the pace of global economic activity. In addition, storage levels have improved but remain tight in the US, with one Chinese trader offering cargoes for delivery in December. A key consideration for the magnitude of the recovery will be how well demand matches up with supplies next year, which will be contingent on the availability of Russian crude and products and economic activity not only globally but especially in China. Today’s strength in the forward curve might be the first sign of developing tightness and will need to be monitored for insights into market direction. Overall, we have a bias to the upside, but it will be contingent upon a stabilizing global economy and growth in oil demand in 2023,
The DOE report on Wednesday is expected to show crude stocks lower by 2.5 mb, distillates up 1.4 and gasoline higher by 1.6, with refinery utilization up .1 to 94.0 percent.
Natural Gas
After surging higher prior to the Thanksgiving holiday, the market has given back a large poriton of its gains as the January contract settled 13.4 cents lower today at 7.196. Cold temperatures that had been in the forecast early last week have trended warmer, as overnight revisions extracted as much as 45 bcf in demand from the 15 day outlook. The revisions pushed prices to a test below 7 dollars early in the session. Production has reestablished the 100 bcf/d level, exceeding triple digits six of the last seven days, which has added to the weaker bias. The expiration of the December contract today added volatility, as it went off the board 31.2 cents lower at 6.712. The recovery and settlement above the 9-day moving average is a near term positive, with the 100-day moving average near 7.69 the next target on the upside. Any weakness will run into initial support near 7.05 and below there at 6.75.
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