Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
Volatile trade continued in the petroleum complex as the April WTI has slipped over 10 dollars from yesterday’s high of 100.54 made just after 4 a.m. CST. The strength linked to concern over potential supply disruptions from sanctions on Russia, a major crude exporter to Europe, following their attack on Ukraine. The events did not support values above 100.00 as Western powers failed to specifically target crude and gas flows from Russia but instead placed sanctions aimed at impeding their ability to do business in major currencies along with actions against banks and state-owned enterprises. Germany also agreed to halt certification of the Nord Stream 2 pipeline. Additional selling appeared to have been attracted by the prospect for a coordinated emergency release from Strategic Petroleum Reserves along with reports that buyers of Russian oil are struggling to secure business due to Western banks apprehension to provide financing and to find ships for transport.
The potential that Russian oil could see limited export opportunities on the world market except to China, who could freeze out other producers, might be a stumbling block for OPEC as they hold their meeting next week. We suspect pressure by Western powers on the UAE and Saudi Arabia to increase production will be intense and this could be an opportune time for the lifting of sanctions against Iran, particularly if actions are ramped up against Russia to include oil and gas exports. Whether that happens, as well as Russia’s response and the impact on economic growth is largely guesswork, but we remain cautious considering the uncertainty. The sharp increase in volume noted yesterday in crude could be indicative of a blow-off top. Caution is likely ahead of the OPEC meeting on Wednesday to see if events in the Ukraine add a political bent to the negotiations and pressure both internally and externally builds on Russia to withdraw. OPEC policy is certainly not set in stone and might change to take advantage of higher prices.
Although the delayed release of the DOE report yesterday was largely ignored, it did show commercial crude inventories building by a larger than expected 4.5 mb. Distillate and gasoline fell .6 mb, a smaller draw than expected. Disappearance levels for all products fell back from the record highs of 22.7 last week to 21.5 mb, with gasoline and distillate steady against year ago levels. Refinery utilization rates rose to 87.4 percent compared to 85.3 last week..
Natural Gas
The beginning of the war in Ukraine pushed the gas market higher with most other commodities as the April reached an intraday peak at 4.938 yesterday before retreating to end the week at 4.47 for a loss of 17 cents on today’s session. Although spillover effects were evident, the market did not react as strongly as other commodities due to the fact that our exports are already maxed out, with additional capacity that is set to come online this year not extensive. Yesterday’s storage report indicated a 129 bcf build which was below estimates, and brought attention back to weather forecasts in the US, which lost HDD’s overnight and are not predicting any extensive demand fluctuations into early March. Production remained restrained due to a cold pattern in the South Central region that has lead to some freeze-offs, but signs were pointing to some recovery today. With geopolitical tensions not likely to ease any time soon, today’s low near 4.40 should offer support as long as temperatures remain near normal. With the upside range that was traversed over the last two sessions, no substantial resistance stands in the way of a move to the 4.95-5.00 level if sentiment again turns positive due to overseas events.
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