Energy Brief for Feb 8.23
by market analysts Stephen Platt and Mike McElroy
The petroleum complex saw crude register strong gains while products traded mixed. Support was linked to concerns over pipeline flows and shipments from the key oil port of Ceyhan in Turkey following the earthquakes, along with a continued outage at a Norwegian oil field. In addition, Fed Chairman Powell’s comments yesterday that despite the stronger than expected jobs report, he was not taking a more hawkish position on policy also helped limit selling interest.
With values having reached our short-term target of 77-78 basis March and approaching the 100-day moving average at 79.60, we look for two sided trade to develop. In the near term, adequate supply availability from Russia will persist. Large discounts due to the price cap and import ban continue to reflect good availability of Russian barrels despite a surge in demand from India and China. The displacement of barrels has helped improve availability in Europe, where stocks had been built up in advance of the import embargo and price cap that came into effect this past weekend. Seasonally, demand should weaken as we move into the Spring. Tightness in supply/demand should become more apparent as we move into the second half of the year and demand picks up once again, particularly if growth in the Chinese economy gains momentum as we expect. US demand should be tempered by the higher rate environment, but may not be as weak as expected due to accelerated fiscal spending on infrastructure projects later this year. In addition, Russian output should show modest declines as the lack of investment begins to have an adverse impact.
The DOE report continued to show improving inventory levels in the US. Crude inventories were higher by 2.4 mb while gasoline increased 5 and distillates rose 2.9 mb. Crude stocks at Cushing rose by 1.1 mb to stand at 39.1. Total stocks of crude and products rose 3.4 mb. Refinery utilization increased sharply by 2.2 percent to 87.9. Net import levels of crude remain high at 4.2 mb, with net imports of crude and products at .9 mb against a four-week average of down .6 mb. Total disappearance for all products was reported at 20.5 compared to 21.7 mb a year ago. The report was generally negative with the gas crack coming under pressure in response.
The minor rally seen over the last two sessions ran out of steam today as the March contract settled with a loss of 18.8 cents at 2.396. The brief spike higher was not based on fundamental changes, as good volume and a drop in open interest during the move pointed to short covering. Yesterday’s failure to settle above the 9-day moving average added tecnial resistance to today’s early strength. After last weeks cold temperatures, tomorrow’s storage report is expected to show an above average withdrawl for the first time in a month. Estimates are pointing to a 195 bcf decrease compared to the 5-year average of 171. A number on the high end of expectations would still put total stocks nearly 5 percent above the 5-year average, so the release is not likely to generate any fireworks. No signs of increased activity at Freeport in recent days helped keep the overall sentiment negative. The 2.65 area held resistance, and the market will need to push to a settlement beyond that area to build any upside momentum. The recent lows near 2.35 will offer the first line of support on downside follow-through, and a failure there would lead to a test of 2 dollars.
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