Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex attracted buying interest as caution ahead of the OPEC meeting on September 5th and a recovery in outside markets helped attract short-covering and pre-weekend profit taking. The ability to hold the 85.50 level yesterday along with reports the Iranian and US Nuclear talks have stalled provided background support.
OPEC is expected to rollover current quotas for October, although speculation over a production cut has circulated given recent price weakness and forecasts by the Joint Technical Committee of a modest rebuilding in stock levels in the next few months. In addition, reports that G-7 Finance chiefs agreed to impose a price cap on Russian oil caused concern. Uncertainty over the Russian response along with the level of participation by India and China, who have not adopted sanctions and have increased their purchases of Russia oil at steep discounts, remain key considerations on how effective the actions will be. A key component of the plan is using shipping insurance and financing to enforce the price cap. Key details remain lacking.
On the upside the market continues to encounter selling pressure as new lockdowns in China raise concerns over global economic activity, particularly given the recessionary trends in Europe. While stocks remain tight, particularly in the US due to heightened export demand, challenges on the demand side remain given that Russian availability has been better than expected.
WTI looks to have priced in the bulk of bearish news, but to a lower range than expected due to further deterioration in the outlook for China. Volatile consolidative price action in the 85.50-93.00 range might transpire as low US stocks and the OPEC meeting on September 5th remain in focus against a backdrop of deteriorating economic conditions and dollar strength. Key support continues to rest at 85.50 basis October.
Natural Gas
After testing the 9 dollar level multiple times this week, the market finally broke through to trade down to an intraday low at 8.619 basis October. Higher production levels pressured values, as yesterday’s revisions put US output at new highs above 99 bcf/d. Weakness to overseas prices added background resistance as talk that European regulators were considering a price cap on natural gas pushed values there sharply lower. Yesterday’s storage report showed a 61 bcf injection, which surpassed estimates and was seen as an overall negative as well. Prices saw some recovery at mid-session today as Gazprom announced that there were issues with Nord Stream 1 that would require it to remain closed. Today’s settlement at 8.786 violates the 9.00 and 8.86 support levels and opens up the door for a continued retrenchment, with initial support at 8.50. The 9 dollar level now becomes the first level of resistance on a recovery.
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