Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil retraced from the sharp gains late last week, with prices settling lower by 1.09 at 85.26 basis December. Reports that the US had agreed to lift sanctions on Venezuela’s oil industry in exchange for allowing a freer election in 2024 appeared to offset the potential for a major incursion by Israel into Gaza to eliminate Hamas and the heightened geopolitical tension and uncertainty it would create.
The conflict in the Middle East continues to be watched closely. For now, the US backed plan to normalize Saudi ties with Israel in return for a defense deal with the US is on ice. In addition, participants are watching whether US sanctions against Iran will be tightened given their support of Hamas. The US has been reluctant to put additional pressure on Iran given the possible impact on their export levels which have been growing recently and a key component of the global supply balance. This has been particularly true given the tightening sanctions by the US on shippers to abide by the price cap of 60.00 on Russian exports.
Tight global inventory levels should provide support to values into the November crude expiration on the 20th, with potential for the December contract to eventually test the 88.00 area. Resistance should emerge at that level as the market assesses the supply/demand outlook and the effect high interest rates and a strong dollar have on emerging markets and the Chinese economy. Although Chinese manufacturing activity appears to have stabilized in September, additional stimulus might be necessary to meet growth targets. The lifting of sanctions on Venezuela should not appreciably affect the supply/demand balance given their limited ability to expand production in the near term. More important might be the decline in Saudi crude exports, which hit their lowest level in 28 months during August at 5.58 mb, which might play into their decision regarding extending voluntary production cuts in 2024.
The DOE report is expected to show crude oil inventories falling by 1.3 mb, distillate off 1.7 and gasoline lower by 1.6. Refinery utilization is expected off .2 to 85.5 percent.
Natural Gas
Prices gapped lower coming out of the weekend and remained under pressure throughout the session, closing with a loss of 12.7 cents at 3.109 basis November. Continued strong production numbers fueled the follow through weakness, reaching a record just shy of 105 bcf on Sunday. Downward revisions in demand from the updated weather forecasts added selling pressure. LNG flows underpinned values, exceeding 14 bcf for the last 5 days, but it was not enough to overcome the surging production and negative momentum. The settlement back below the 9-day moving average is a near term negative, with the 20-day near 3.05 holding support today. A move below there would target a test of 3 dollars. The overnight gap at 3.203 will be the first target of a price recovery, with the 3.26-3.28 area thick resistance above there.
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