Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex recovered from recent sharp losses and settled higher by 1.81 at 71.17 basis January crude. Strength developed in response to calls by Saudi Arabia and Russia on other OPEC+ members to join an output cut agreement following their meeting yesterday. The voluntary cuts, totaling approximately 2.2 mb, have been greeted with skepticism regarding the likelihood of compliance. Signs that Russia was willing to be more forthcoming with production and shipment data for crude and products provided a more comfortable backdrop to believe that the two major producers will abide by the agreement, helping encourage other members to toe the line. Additional support was traced to Venezuela pledging to annex the disputed Essequibo region in Guyana and directing state owned oil companies to explore the region. The action prompted the US to announce military drills with Guyana.
The recovery, following weakness apparent this week, reflects a belief that if values get much lower it will encourage a more unified approach on the part of OPEC+. The weaker prices should also encourage better buying by major consumers such as India and China, as Russian prices move back into the price cap range.
The market will be sensitive to prevailing stock levels of crude. Recent increases in US inventories and high production have been a headwind to values. Stocks have trended toward normal ranges following the tight levels reached in September. A contracting economy might impact demand but at a slower rate than would be apparent if prices were higher. In addition, OPEC will also need to show a more coherent and unified strategy centered on target compliance to provide more than token support to values. The impact of lower crude oil valuations on production will be watched closely along with the pace of global economic activity, which continues to be a source of concern. The latter will be a restraining influence on a strong recovery in values until a more constructive demand environment develops in Asia, the US and Europe.
Natural Gas
The market probed out another new low yesterday at 2.489 before finding support from the weekly storage report to eke out a small gain on the day. Sideways action was seen today with a settlement near unchanged at 2.581. The 117 bcf draw was well above expectations near 105, but was only able to stabilize prices and has not generated substantial upside action. Tepid demand in the 15-day forecasts and longer term expectations for a mild winter due to the strong El Nino pattern are keeping the market in a steady downtrend. Add to that the continuation of near record production levels and it is hard to argue for higher prices. The test of 2.50 maintains that level as solid support. The minor flagging action on the charts mimics what we have seen for nearly a month as the market remains entrenched in a downtrend. A settlement below 2.50 could signal a continuation of the trend with a target at 2 dollars and then the early 2023 lows near 1.945. With the market extremely oversold, a shred or two of positive news could trigger short covering and technical trade that exaggerates a bounce, with the 9-day now at 2.71 offering initial resistance followed by 3 dollars, which marks a 38 percent retracement of the current break.
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