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Energy Brief for Feb 22

Price Overview

The petroleum complex traded higher on the slow return of US crude output following the frigid conditions in key shale producing areas of Texas and Oklahoma. The reopening of some refineries helped encourage retracement in the cracks from the strong gains noted last week.  Additional support was seen on ideas the Saudis will slowly increase production as we move past March, helping maintain a tightening balance as production recovers slowly at a time when demand might provide unexpected upside surprises. Supporting sentiment was a report by Goldman Sachs sharply raising their upside targets for Brent to 70.00 and 75.00 during the second and third quarters of 2021, as they cited lower than currently expected inventories, higher costs for restarting upstream assets, and higher inflationary expectations attracting increased speculative inflows.  The tight situation assumes a modest increase in production quotas of .5 mb/d in April along with Saudi Arabia reversing its voluntary cut.  Ideas that production costs might increase to $60 per barrel implies production will be restrained for now.

Bullish sentiment has been gaining momentum but we remain cautious as WTI approaches the 63-65 area.  US shale production recovery might surprise on the upside as some producers speed up development of new wells to avoid any tax changes that might be seen next year. Nevertheless the uncertainty associated with potential pent up demand of the domestic economy as vaccines are rolled out remains a major question mark along with the response of OPEC+ producers to the possible easing of sanctions on Iran and the need for foreign exchange and domestic growth tied to oil in many producing countries. The DOE report on Wednesday is expected to show crude oil inventories off 5.4 mb, distillate off 3.9 and gasoline off 3.4 while refinery utilization is expected to decline by 7.5 percentage points due to the Texas weather issues.

Natural Gas

The market has given back a large portion of the gains seen last week from the extreme cold event, despite lingering questions regarding the pace of production recovery and the status of storage levels when the dust clears.  The follow through weakness was attributed to forecast revisions that came into the week with markedly less HDD expectations than Friday’s outlooks.  The March contract, which expires on Wednesday, tested all the way down to the 2.90 area before finding support late in the session.  The active April traded through support at the same 2.90 level but was unable to settle below there, ending the session lower by 5 1/2 cents at 2.935.  This week’s storage report will show a sizeable draw, likely in the 350 bcf area, obviously well above the 5 year which comes in at 120.   This number and next weeks will go a long way toward deciphering how drastic of an effect this weather event had on supply as well as demand, as extensive outages were seen across the South Central US.  If drawdowns exceed expectations, it could lay the groundwork for prices to trend higher.  Production and LNG flows improved over the weekend, as they were indicated at 82.6 and 8.6 bcf/d respectively this morning.

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 Charts Courtesy of DTN Prophet X, EIA, Reuters

Futures and options trading involve significant risk of loss and may not be suitable for everyone.  Therefore, carefully consider whether such trading is suitable for you in light of your financial condition.  The information and comments contained herein is provided by ADMIS and in no way should be construed to be information provided by ADM.  The author of this report did not have a financial interest in any of the contracts discussed in this report at the time the report was prepared.  The information provided is designed to assist in your analysis and evaluation of the futures and options markets.  However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.

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