Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex traded on both sides of unchanged before April crude settled with a gain of 87 cents at 78.46. The nearby spread has moved into backwardation due to increased shipping costs from restricted movements on the Suez Canal. Low inventory levels have also raised the potential for India and China to try and rebuild stocks following the contraction in purchases late in 2023, with heightened military actions in Gaza in the background.
The IEA report released yesterday initially provided a headwind to values but failed to attract fresh speculative selling interest at the lower levels. The Agency indicated global oil demand growth is losing momentum, with the pace of expansion set to decelerate to 1.2 mb/d in 2024 compared to 2.3 in 2023, with supplies increasing by 1.7 mb/d. Any support from the report could be traced to the decline in global observed stocks reported of 60 mb in January with on-land inventories falling to their lowest level since 2016. In December, global stocks rose by 21.6 mb as a surge in oil on water more than offset draws in on-land inventories, with OECD stocks falling by 24.1 mb.
The strength, which has carried values back up toward mid-January and November intermediate highs near 80.00 in the April contract, is linked to prevailing stock levels in key consuming areas. Given the recent DOE report that showed a sizable build in crude inventories and weakness in refinery utilization due to seasonal maintenance, the potential exists that a more comfortable inventory level will develop. Given the uncertain interest rate environment in the US combined with weakness in retail sales reported yesterday, a slight build in inventories could occur by the end of the first quarter of 2024. This will limit upside potential and leave the market subject to price erosion if OPEC attempts to unwind voluntary production cuts in the second quarter and confine values to a range of 74-80 basis prompt crude.
Natural Gas
After a feeble rally attempt early yesterday, the market was disappointed by the weekly storage report showing a 49 bcf withdrawl from stocks when expectations had been near 69. Prices reacted by making another new low and settling with a loss for the eighth straight session. Values rebounded slightly today ahead of the long holiday weekend, with the March contract gaining 2.8 cents to settle at 1.609, while the active April added 3.3 cents to 1.680. Buying interest lacked fundamental backing, consisting mostly of profit taking. Trade was deciphering several earnings reports from drillers suggesting that they would be decreasing rigs due to the low prices, but there was little sign of slowing in current output levels. Background concerns remained as to whether it would be enough considering increased efficiencies as well as associated gas production from booming crude output. Yesterday’s settlement below 1.60 puts the June 2020 low at 1.432 squarely in the view of bears. RSI remained below 20 percent even with today’s bounce, as the 9-day moving average now at 1.777 marks the level that needs to be violated to build any hope of a trend reversal.
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