Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Surprise surprise. OPEC+ pulled a fast one on Sunday, one day ahead of the Monitoring Committee Meeting, by announcing voluntary cuts starting in May. The group aims to reduce output by an additional 1.16 mb/d, on top of the 2 mb/d already in place since November of last year. According to Reuters citing officials from Saudi Arabia, the additional cuts are precautionary and aimed at achieving stability in the global oil market. Saudi Arabia said it would be cutting output by 500 tb/d, the UAE by 144 tb/d, Kuwait by 128 tb/d, while Oman announced a cut of 40 tb/d. Output from Algeria and Kazakhstan will remain off by 48 and 78 tb/d respectively. We suspect the numbers take into consideration the 500 tb/d production cut of Russia that had been previously announced. Given current underproduction relative to targets, the cut is likely to equal between 700-900 tb/d overall. It has been speculated that it is in response to recent weak price conditions, the lack of SPR purchases by the US and better relations between Saudi Arabia and Iran.
The move raises questions on the demand front, the state of diplomatic relations in the Middle East, and the growing influence of Russia on Iran and Saudi Arabia to the detriment of the West. The expectation for stocks to be drawn down during the second half will need to be watched. How quickly the Chinese economy recovers will continue to be key to the outlook, along with how aggressively they buy crude at the higher prices given recent stockpiling.
Our 80 dollar upside target for prompt crude came quicker than anticipated and we need to reassess the prevailing supply and demand trends, particularly for the summer, with 91.00 not being ruled out. The OPEC action and seasonally strong summer driving trends will limit setbacks to the 77-78 area for now.
The DOE report on Wednesday is expected to show crude inventories lower by 1.8 mb, distillate down .1, and gasoline off by 1.4. Refinery utilization is expected to increase .5 to 90.8 percent.
Natural Gas
The market continued its steady decline today, as the May contract traded down to a new low at 2.015 before settling with a loss of 11.9 cents at 2.097. A swing in forecasts that saw a loss of 30 bcf in demand over the next 14 days initiated the selling, and pushed overnight prices to their lows. With the revisions, temperatures are now expected to be above normal into the middle of April. Freeport LNG returned to full strength over the weekend, reaching a record 2.26 bcf on Saturday, but it could not garner any substantial buying in the face of weather demand losses and recent improvements in production to the 100 bcf/d area. With the withdrawal season ending, the market will be hard pressed to find upside momentum in the near term, but impressive exports should eat into the storage overhang and help the market build a bottom in the coming weeks. The 2-dollar level is obviously solid support, with 1.80 the next are beyond there. Any strength will find substantial resistance at the 9-day moving average which is currently at 2.21, with a settlement through there having difficulty extending beyond the 20-day moving average now at 2.43.
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