Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil continued to press above the 90.00 level basis October following Chinese industrial production increasing to 4.5 percent compared to expectations at 3.9, along with retail sales rising 4.6 percent due to summer travel activity. In the background were the expected declines in petroleum inventory levels during the 4th quarter. Support was also traced to the possibility of a work stoppage at the Fawley, Grangemouth and Pembroke refineries in the UK. Surprisingly the 2-oil and gasoline crack failed to respond as the focus shifts to the low level of Cushing crude stocks, which has provided support to the outright market and spreads in WTI due to it being a key delivery point. Selling of the cracks was also linked to the mixed picture for European stocks in the ARA region, where total stocks as of September 13th rose by 68,000 MT to 5.36.
Cushing crude oil stocks remain a source of concern given the dramatic decline since the end of June from 43.2 to 27.4 mb. The drawdown has led to price backwardation reflecting the tightness. Due to the growing importance of US exports, the Gulf Coast has become a key region, raising questions over the relevance of Cushing stocks in global trade. Nevertheless, support has been apparent as stocks decline and trigger short covering in the WTI futures contract.
Despite the penetration of our expected resistance near 90 dollars, the market is overbought and ripe for a correction. The Chinese economy will need to be watched closely despite the improvement in industrial production and retail sales. The higher prices have led to better availability from key producers which should persist despite the voluntary cuts by Saudi Arabia and Russia.
Natural Gas
After attempting to rally early yesterday the market was brought back to reality by the weekly storage number that showed a 57 bcf build that was well above estimates near 48. A return to full operation at Freeport LNG had been supporting prices, but the surprise build and production bounce above 102 bcf/d weighed on sentiment into the end of the week. Despite a recent uptick in volatility today’s settlement at 2.644 puts the market near the middle of its 6-month range. As we head into the shoulder period, sideways trade is likely to persist. The 9-day moving average currently at 2.63 remains initial support followed by 2.50. Yesterday’s spike high at 2.823 marks initial resistance with trade avove there targeting 2.86.
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