Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil continued to trade firm, settling at 87.54 for a gain of 85 cents and reaching levels that had not been seen since November of 2022. The strength was linked to news of Saudi Arabia and Russia extending their voluntary production cuts of 1 million and 300,000 barrels into the end of the year. The extension was a surprise and raised fears that tightness would be exacerbated into the fourth quarter when stocks were already expected to decline. Despite the action some caution was apparent as scattered selling developed in response to concerns over the global economy given the increase in US interest rates and continued sluggishness to the Chinese and Japanese economies. In addition, rising production in some OPEC producers such as Iran and Venezuela and non-OPEC producers such as Brazil has injected some caution into trade. Speculation over future policy has also been apparent with some analysts suggesting that a scaling back of voluntary production cuts might be apparent near the 90.00 level given the potential impact of higher prices on demand.
Key to the near-term price action will be tomorrow’s DOE report which was delayed due to Labor Day. Current estimates are for a decline in crude stocks of 1.4 mb, a drop in gasoline of .8, with distillates expected to rise by .8 mb. Refinery runs are estimated to have fallen by .1 to 93.2 percent with the potential for further declines in upcoming weeks as refineries shut down for normal seasonal maintenance and the switch to winter grade gasoline.
Progress has been made in expanding production and availability from both non-OPEC and OPEC producers. However, it is still short of demand in the fourth quarter and with the announced voluntary cuts of close to 1.3 mb/d by Saudi Arabia and Russia, further declines are likely. 2024 looks to have a more balanced supply/demand environment which could ease upside pressures. In the absence of additional SPR sales, further declines in commercial crude stocks are likely with potential for a move toward the 88-90 level basis October.
Natural Gas
The market gapped lower coming out of the long holiday weekend and has not looked back since. A drop of over 18 cents yesterday was followed with a 7.2 cent loss today as the October ended the session at 2.51. Multiple factors merged to sour sentiment, with the initial weakness tied to signs that current above normal temperatures will give way to moderation by mid-month, with the second half of the 2-week forecasts losing as much as 35 bcf in demand compared to Friday’s outlook. Extremely high wind generation over the weekend eased the call on gas and added downside bias, while production jumped to nearly 103 bcf/d to further pressure values. In the background were concerns about the rapid formation of Tropical Storm Lee which is currently not expected to hit the US but has the potential to effect the East Coast as it strengthens into a hurricane in the coming 1-2 weeks. The 2.50 level should offer some support, with a settlement below there signaling a test of the lows at 2.377. The quick move lower leaves initial resistance all the way up at the 9-day moving average near 2.67. Tomorrow’s storage report is expected to show a 43 bcf injection compared to the 5-year average at 60.
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