Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex traded sharply higher but ended well off levels reached in the overnight session. Strength was linked to additional sanctions on Russia, which included prohibiting transactions with their Central Bank and Sovereign fund. Prospects that Russia will face severe disruptions to its exports of commodities including oil, strategic metals such as palladium and nickel, and grains following the cut-off of some banks access to the SWIFT International Payment system encouraged strong buying interest in crude and products. Tensions were also heightened by President Putin putting their nuclear deterrent on high alert as negotiations began with Ukraine at the Belarussian border. Reports that Russian forces had seized two small cities in South Eastern Ukraine were counter balanced by reports of stiff Ukrainian resistance in other areas. The uncertain future for Russian oil production remained in the background as sanctions and the exodus of Western oil companies raised questions over longer-term investment. Offsetting some of these concerns was the potential for demand destruction and quicker substitution of renewable energy sources.
Key to the outlook for this week will be the meeting of OPEC and its allies known as OPEC+ beginning on March 2nd, along with the position of China following their trade agreements earlier this month with Russia. In addition, the IEA will be meeting tomorrow to discuss a coordinated release from Strategic Reserves.
How OPEC addresses the events in Ukraine remains uncertain. The UAE and Saudi Arabia are the only members with any sustainable production capacity that could have a significant impact toward lessening European reliance on imports of Russian energy. Russia has been gaining influence in the area in recent years and questions have arisen over the reliability of Washington as a military and economic partner. So far no OPEC members have moved to sanction Moscow. Another factor that could play a role is the Iranian JCPOA negotiations and whether they will be pushed at a quicker pace. Undoubtedly a breakup of OPEC+ holds little risk to the Saudis or UAE and actually would benefit them in the global community. Whether they will take advantage of this position along with the ability of the US and Europe to influence their decision will be a key determinant for valuations.
The DOE report is unlikely to change the current dynamics of the market. Estimates indicate crude stocks to be up 2.8 mb, distillate down 1.8 and gasoline lower by 1.5, while refinery utilization is expected lower by .3 to 87.1 percent.
Natural Gas
The market started the week with a 30 cent price swing as the April contract ended 7 cents lower at 4.402 after trading as high as 4.683 on the Sunday night open. The situation in Ukraine offered the early strength as commodities across the board saw a wholesale reversal of Friday’s weakness. Attention turned to domestic fundamentals as the day session got under way, with the weather again driving prices down on forecasts showing significantly lower HDD expectations compared to Friday afternoon runs. Production levels also offered resistance, as they continued to recover from setbacks last week due to freeze-offs in the South Central region. Output was just shy of 94 bcf/d over the weekend after dipping as low as 92.5 bcf last week. LNG flows were supportive as they appeared to be recovering from recent weakness, exceeding 13 bcf/d on Saturday. Geopolitical tensions should continue to underpin the market, as the 4.40 support level was tested today and is likely maintained as long as we don’t suffer substantial setbacks in demand. The range up to 4.70 has been traveled 5 times in the last week, with any move higher finding little resistance until that area.
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