Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex staged a strong recovery from lows for the move reached on Monday of 76.25 settling near 82.00 per barrel. Early weakness today which carried values down to 76.55 basis November and was linked to bearish API data that was later negated by the DOE report helped attract the better buying interest. While some attributed the early strength to the shuttering of some oil platforms in the GOM due to Ian we suspect other factors at work. Strength to outside markets with both interest rates and the dollar declining helped encourage renewed buying within the complex following reports the Bank of England would engage in Quantitative Easing by buying long dated bonds. The announcement helped soften the reaction to recent Fed comments that more rate hikes are needed and risks to the US economy remain high.
Other more fundamental forces unique to the energy complex were also apparent. These included:
– Reports that Russia was calling for an output cut by OPEC+ of 1 mb/d ahead of their meeting on October 5. Questions continue to arise whether such a cut would have much impact given the current underproduction relative to target that is approaching 3 mb/d. How much support the proposal will have from the Saudi’s and UAE remains to be seen since they remain a primary beneficiary of a ban on Russian crude imports by the EU in December.
– Concern over the security of energy infrastructure in Europe following the suspicious gas leak in the North Sea and speculation it might have been sabotage.
– More important than anything might have been the DOE report. The report showed commercial crude inventories falling by .2 mb with withdrawals from the SPR totaling 4.6 mb. Total stocks of crude and petroleum fell by 8.9 with gasoline and distillate falling by 2.4 mb and 2.9 mb respectively. Refinery utilization fell to 90.6 percent compared to 93.6 in the week prior. It is expected given the tightness in diesel markets, refining rates are expected to remain above the 90 percent level in ensuing months. Disappearance levels recovered strongly from last week’s levels to 20.8 mb as distillate and jet kero demand recovered. Export levels for both crude and products reached 2.7 mb. Tightness in gasoil markets and uncertainty over nat gas availability in Europe should continue to underpin demand until better availability emerges potentially from China in refined products. Given the prospective slowing in SPR withdrawals in coming months and likely cessation concern should build over the adequacy of stocks on forecasts demand will recover in 2023.
For now, we see the 76.00 level as an intermediate low point for the market and an area of stiff support with potential to move up toward the 86.00 area and possibly 88.00 basis November WTI before better resistance emerges. Key to the outlook will continue to be the direction of the dollar along with interest rates. A stabler tone might remove some of the economic uncertainty that has been weighing on markets.
Natural Gas
Nat Gas recovered from early weakness that carried values to a low of 6.56 basis November and prices settled up 19.50 cents at 6.955. Early weakness on fears Hurricane Ian would affect demand appeared to be overdone as the market looks ahead to the restart of the Freeport LNG facility in mid-November along with the major gas leak in the Nort Sea. Some reduction in LNG exports is expected next week as the Cove Point plant closes for maintenance. However underlying support continues to be provided by rising exports to Mexico along with the maintenance of high LNG export levels despite the Freeport closure. The EIA storage report on Thursday is now expected to show an injection of 94 bcf putting gas in storage against the 5 year average -9.6 percent. Key support remains near the low today of 6.562 while overhead resistance should be apparent near 7.50 if near term resistance at 7.20 basis November can be breached.
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