Written Commentary
Price Overview
Prices traded higher following the extended OPEC meeting that concluded yesterday. OPEC and Russia agreed to slightly ease their oil output cuts in January by 500 tb/d, but failed to come up with a compromise on a broader and longer term plan for dealing with imbalances for the rest of the year. The agreement puts current cuts at 7.2 mb/d. Whether it is enough to balance the market is questionable given the surge in virus infections in Europe and the US which is prompting additional lock-downs. The compromise was reached with the Saudis favoring a rolling over of current cuts into March. Other producers including Russia, Iraq, Nigeria and the UAE appeared to favor a larger production increase on hopes for an effective vaccine ultimately boosting demand in the coming year. There were also concerns that a further tightening in the market would force prices toward levels that could encourage production from non-OPEC producers, particularly in shale areas of the US. Compensatory cuts, which have been unfilled, were extended to March. The group decided that the announced cut will be effective for January and that they will now meet monthly to determine output levels.
Natural Gas
Prices suffered a major blow yesterday as the active January lost over 26 cents and tested the 2.50 level intraday. The capitulation was ignited by continued downward revisions to HDD expectations, as some cold in the two week forecasts was downgraded in the last few model updates. A lower than expected draw of 1 bcf from stocks added to the downside pressure as fund longs appeared to throw in the towel and intensify the selloff. The continued lack of weather demand has steadily pulled almost all the winter premium out of the market. Surprising production flexibility, which jumped to as high as 92 bcf/day recently, has added to the deflating sentiment. Only a few months ago expectations were for output to continually contract this winter well below 90 bcf/d. Prices saw some recovery today as the selloff had overextended itself, with underlying support from likely coal to gas switching and bargain hunter buying.
Charts Courtesy of DTN Prophet X, EIA, Reuters
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