Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex traded sharply higher, fueled by fears of a supply disruption in the Permian Basin due to frigid temperatures. Still fresh in traders’ minds was the extensive cold spell last year which affected both production and refinery utilization. With a tight inventory situation continuing to prevail any shortfall will intensify sentiment to the upside. In the background are OPEC+ production restraint levels along with shortfalls by some producers with recent reports suggesting Iraq failed in January to reach their targeted production by 120 tb/d while Libya, who is exempt from output curbs, appeared to be experiencing adverse weather that has affected export rates. With the payroll data still suggesting strength to the underlying economy in the US and substitution of petroleum derivatives for natural gas taking place in Europe, potential for demand to exceed current expectations has also provided a bullish backdrop for values.
The overbought position of the market in response to Ukraine, weather and low inventories continues to give us pause and we suspect the market is prone to a correction that has the potential to carry March down to the 88.50 level and possibly toward 85.00. Weakness to values, particularly in the back months, might ensue if weather in Texas and Oklahoma fails to disrupt production similar to what occurred in February of last year. With many operations on alert, threats to production at the well head and refinery level might be far less than currently envisioned. In addition, the Iranian Nuclear negotiations are being ignored as a potential supply source. The US Administration is already dispensing with the maximum sanctions enforcement policy and saying little about the import of Iranian and Venezuelan oil by China. Reportedly the indirect talks between the US and Iran are entering the final stretch, with both sides having to make tough political decisions. Some have suggested that Iran could lift supply by as much as 1.5 mb/d if the sanctions were lifted. In addition, US shale and Canadian production look poised to expand dramatically in the current year. Such a shift would undoubtedly aid supply availability and undermine current bullish sentiment longer term by reversing the entrenched belief that low inventories are here to stay.
Natural Gas
Mid-week gains quickly dissolved over the last two sessions as the March settled at 4.572, a loss of 32 cents on the day and close to 7 cents for the week. The panic buying that was seen Wednesday on fears that Winter Storm Landon would wreak havoc on power infrastructure reminiscent of Uri last year seemed to fade as initial signs indicated that major issues would be averted (see comparison of production losses in chart on right). The last two days also saw expected cold in the back half of the 15 day forecast revised down significantly, which added to the weaker tone. Yesterday’s lower than expected draw of 268 bcf also had a dampering effect on the rally as expectations had been in the 277 area. Despite the price weakness, production has dropped significantly due to the storm, and how quickly it returns will be critical to near term market direction. Expectations are still pointing to the next two withdrawls coming in above 200 bcf, which could rustle some concern over EOS storage levels if the second half of February or March turn colder than normal. The retrenchment has brought prices back to a test of the 100 day moving average at 4.55, which should offer good support if weekend forecast revisions can stabilize. With the wide recent range, any recovery could find minor resistance ner 4.75 but likely nothing significant until the 5 dollar area.
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