Energy Brief for Feb 27.23
by market analysts Stephen Platt and Mike McElroy
The petroleum complex continued to trade in a choppy fashion as it assessed the impact of Russian moves to restrict supplies and higher interest rates in the US. Fresh news was lacking, with Russia’s halting of crude shipments through the Druzhba pipeline prompting early buying. Upside follow-through stalled as selling interest was prodded by Federal Reserve statements suggesting interest rates might stay stubbornly high given inflation in the service sector, along with the increase in capital goods orders excluding aircraft of .8 percent, the highest in five months.
The movement in interest rates continues to be a double-edged sword. On the one hand the potential for higher rates to adversely impact US economic growth and the positive impact on the dollar suggests weaker global demand. On the other hand, rising interest rates reflect a strong economy which in turn should supports demand. Signs that the US economy remains on solid footing, apart from the housing sector, continues to limit downside pressures on ideas that usage rates will increase as mobility in China and the US improves.
The DOE report remains a key focal point given the recent sharp increases in inventories. Expectations are for crude stocks increasing by .4 mb, gasoline up .7 and distillate down by .5 mb. Refinery utilization is expected to decline .1 to 85.8 percent.
Choppy price action is likely to persist in the near term as dollar strength and higher interest rates produce headwinds, with support in the 74-75 range. Disappearance levels should show improvement, particularly in gasoline. The US economy remains buoyant, which should provide a basis for a recovery in demand, while the Chinese economy appears to be gaining steam. Although higher interest rates pose a threat to the recovery, we see the market moving into a deficit situation on a global basis later this year, which should provide the basis for values to advance into resistance near the 81.00 level on the prompt crude.
The short-covering rally that started last week has continued, as the April contract gained another 18.3 cents today to settle at 2.731. Fundamentals added marginally to the positive tilt, but for the most part the move was technical in nature. Colder than normal temperatures are now expected in the back half of the 15 day outlooks, but will need to materialize to maintain the improved tone. Freeport has not shown any increased flows as of late, but trade seems to be hoping for more incremental improvements soon. With the 2.70 level violated, minor resistance should surface at 2.80, with 3 dollars in sight if the colder forecasts can be maintained and Freeport activity ramps up. A retrenchment should find initial support near 2.50.
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