Energy Brief for Feb 17.23
by market analysts Stephen Platt and Mike McElroy
The petroleum complex came under pressure, with March crude trading down to a low of 75.06 before attracting short-covering and profit taking ahead of the holiday weekend. The weakness reflected the recognition that supply availability has improved given recent increases in US inventory levels along with ideas the announced production cuts by Russian might not impact availability as much as expected. In addition, supply concerns in Europe eased in response to reports that Kazakhstan will supply 750 tb of crude oil via Russia’s Druzhba pipeline to Germany’s Schwedt refinery, with the potential for additional quantities to be supplied in the future. The refinery is mostly supplied with non-Russian oil. In the background are fears that further rate hikes in the US will derail an economic recovery. Drawdown of secondary inventories built up last year in anticipation of shortages appear to be favorably impacting availability as well.
The breakdown in the March WTI has tested support in the 74.50-75.00 area. Although US disappearance has been disappointing of late, we would expect it to pick up as we move closer to the second half of the year. The US economy remains buoyant, which should provide the basis for a recovery in demand, while the Chinese economy appears to be improving. Although higher interest rates pose a threat, we see the market moving toward balance and possibly into a deficit situation on a global level later this year. How large those deficits are will be crucial in determining how high prices can recover, with the 80-82 range remaining key resistance in the near term.
The market continued its struggles to end the week, as an overnight violation of the 2.35 support area on the March contract lead to follow-through selling. An intraday low was reached at 2.22 before prices settled 11.4 cents lower at 2.275. There continues to be a lack of any fundamental reason for prices to go higher, as weather remains warm, production clips along near 98 bcf/d, and in the background European prices reach there lowest level in nearly 2 years. Yesterday’s storage report was disappointing, showing a 100 bcf draw verses estimates near 109. The only bright spot is LNG flows, which have exceeded 13 bcf over the last two sessions, but steady intake at Freeport near 23 percent of capacity has trade again questioning when operations start ramping up. The failure to violate 2.65 this week marks that area as solid resistance, with a settlement through there necessary to have any hope of flushing out short covering. The move through the 2.35 support area and poor close points to a test of 2 dollars in the near future.
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