Energy Brief for Feb 10.23
by market analysts Stephen Platt and Mike McElroy
The petroleum complex saw strong gains in crude and products, while both ULSD and RBOB cracks also attracted good support. The strength was in response to an announcement by Russia that they would be cutting production by 500 tb/d in March due to the price caps and import ban implemented by the West at the beginning of the week. Suggestions by Deputy Prime Minister Novak that the country could take further steps depending on market conditions encouraged additional buying interest, with values once again penetrating the 100-day moving average on March crude at 79.55. The move comes just nine days after OPEC+ maintained their production policy, and might explain the unexpected increase in the OSP price by Saudi Arabia for March loadings to Asia, where shipments from Russia had recently weakened differentials. In addition, continued disruptions to the Baku-Tbilisi-Ceyhan pipeline following the declaration of force majeure on oil loadings by BP Azerbaijan supported values.
It is interesting to note that despite sanctions last year, Russian oil output rose in 2022 by 2 percent to 10.7 mb/d. However, the price caps and export ban on crude have led to wider discounts for Russian oil with their budget posting a deficit of $25 billion in January and the current account surplus falling by 56.2 percent to $8 billion. The increase in military actions in Ukraine is expected to raise the deficit further, which could put added pressure on Putin to enter into negotiations, particularly if arms deliveries from the West increase.
Despite the Russian moves to cut production, we are not convinced that it will significantly limit availability near term as we approach the highs reached in January near 82.60 on the March contract. Key to the outlook will be China’s economic growth trajectory. While we suspect a global supply/demand deficit will develop in the second half of the year, the improved inventory situation in both the US and Europe should pose resistance near term. Keys to the supply/demand outlook will be the OPEC Monthly Report to be released February 14th and the IEA Monthly Outlook the following day.
A minor improvement in prices has been eeked out over the last two sessions, with Thursday’s 3.4 cent gain followed up with an additional 8.4 cent improvement today. Yesterday’s storage report showed a 217 bcf drawdown, well above estimates near 195, and was enough to lead the market to a small gain on the session. Upside follow-through today was aided by reports that Freeport would begin loading ships this weekend after receiving regulatory approvals yesterday. Trade remains unconvinced that they will be moving substantial amounts of LNG in the near future, as evidenced by the widening contago of the shoulder months verses the March contract, with the April trading out to as much as a 9 cent premium today. The market managed to settle above the 9-day moving average for the first time in three weeks, which is a minor positive that could lead to a near term test of the 2.78 area if resistance at 2.65 can be taken out. 2.35 remains solid support, with a failure there likely leading to a test of 2 dollars.
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