Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil remained under pressure, losing 1.03 to settle at 73.04 basis January, as doubts over the OPEC+ decision to employ voluntary cuts to balance supply and demand in 2024 pressured values. The new deal saw an expansion of voluntary commitments to 2.2 mb/d from 1.3 previously, with Saudi Arabia and Russia rolling over their December levels, and other members signaling additional cuts of 900 tb/d. Given that the agreed restraint is voluntary, the market is questioning whether the producers will follow-through on their pledges. In addition, the agreement suggests that the Saudi’s are unwilling to cut further without stronger support from other members.
The uncertainty over adherence to the agreement is weighing on values given output levels are beginning to recover in smaller producing areas such as Nigeria as tightness in supply chains eases. In addition, the crude market is facing headwinds from uncertainty over global demand and the potential for output increases from non-OPEC producers such as Brazil, the US, Guyana, and Canada. Weakness in global manufacturing activity remains evident in major industrial areas and China’s economy remains a question mark due to continued weakness in their property and export sectors.
The continuation of last week’s downtrend reflects uncertainty over whether OPEC producers can manage production levels consistent with demand. The failure to reach a solid agreement and instead fall back to voluntary cuts suggests they might be in disarray, and further downward pressure toward the 70.00 area basis January could be necessary to pressure them to take more concrete actions, which will fall on the larger Middle East producers if they occur.
The DOE report on Wednesday is expected to show a decline in crude oil inventories of 2.3 mb and an increase in distillate and gasoline inventories of 1.0 and 1.2 mb respectively. Refinery utilization is expected up .8 at 90.6 percent.
Natural Gas
After a brief period of sideways trade last week, the market regained downside momentum, gapping lower overnight and ending the day with a loss of 12 cents at 2.694. The hope for a cooler trend to temperatures faded after the weekend saw minor revisions to the 15-day forecasts that are pointing to one of the warmest outlooks for this time of year on record. With the January expiration on December 27th, the chance of a recovery in values fades with each passing day, especially with production being maintained near record levels. The market now looks poised to test the 2.50 area with some minor support at 2.62 on the way down. The glimmer of hope for a rally still lies with the oversold level of the market, with the RSI dipping under 17 percent today. Any recovery could trigger short covering and technical trade that would amplify the move, with the 9-day now at 2.88 offering initial resistance followed by the psychological 3 dollar level.
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