Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex traded in a choppy fashion, with early pressure reflecting Chinese crude imports declining by 2 percent year-over-year during September. The drop was attributed to reduced throughput from independent refiners, who account for as much as 20 percent of China’s crude imports. The drop in output continues to be tied to the thin margins and lower demand due to their zero COVID policy and lockdowns, which have curbed travel and manufacturing. What appeared to have been overlooked was the delayed data on GNP and industrial production which showed year-over-year GNP was up 3.9 percent compared to expectations at 3.4, and Industrial Production which increased by 6.3 percent compared to expectations of 4.5. Although historically the data remains weak, the petroleum complex should take some comfort in the idea that the Chinese economy is not stagnating.
The market remains torn between conflicting indicators suggesting recovering demand in China offset by growing concerns over US monetary policy aimed at slowing growth to limit inflationary pressures. Ideas the Fed is approaching levels that might prompt a pause in their interest rate policy was evident with recent strength in equity values and stabilization of short-term interest rates.
The appearance that demand is holding up in the US and China is beginning to provide support as US SPR releases run their course. China remains a key to demand trends. Any signs that their policy toward COVID might begin to ease should provide support along with their sharp increase in export allocations for refined products.
With the OPEC cutback suggesting a contraction in availability of close to 1 mb/d in November along with the cessation of SPR sales, we see the market getting increasingly tighter just as Europe bans Russian imports on December 5th. While near term resistance might be provided by moderate weather for the US and Europe and a pick-up in Russian availability as the European import ban on crude draws closer, we still see the market attracting support on the low stock levels, end of SPR sales and as demand for middle distillates trends higher into winter.
The DOE report on Wednesday is expected to show crude inventories rose .2 mb, distillate dropping 1.1 and gasoline down by 1.2 mb. Refinery utilization is expected to fall .3 to 89.2 percent.
Natural Gas
The market finally found some buying interest after probing down to a new low overnight. The December contract recovered to end the session with a 28 cent gain at 5.753. There wasn’t a substantial amount of positive fundamental news, as the bounce appeared to be a short covering rally after prices reached extremely oversold levels when the RSI dipped below 20 percent on Friday. Weekend forcast revisions trended cooler in the back half of the 15 day, which lead to some buying interest on the possible switch in trend. Production held near the 99 bcf/d area over the weekend as another minor supportive factor, while signs of gas flowing to Freeport LNG also caught the eye of traders, and although minimal it is still a sign of life as the market awaits the next bit of news from the facility. European prices continue to exert background pressure to the downside as Dutch TTF prices dipped below 100 dollars for the fist time since eary summer as warm temperatures and nearly full storage facilities pressure prices. With initial resistance near 5.75 tested today, the next upside target looks like the 6 dollar area, with any foray beyond there needing a swing to colder temperatures. A settlement below 5.40 would reignite the downside with 5 dollars the next target.
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