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Energy Brief for Jan 11

Price Overview

The petroleum complex traded on both sides of unchanged and settled with modest losses. Weakness emanated from rising infection levels and a slowing US economy due to the pandemic.  A pullback in equity values following strong recent gains and dollar strength also encouraged profit taking. Underlying support continued to be traced to the Saudi announcement last week that they would undertake a voluntary cut in production of 1 mb/d to avoid an unwanted build in global inventories. Forecasts by Goldman Sachs that a small deficit will ensue over the next few months also helped raise uncertainty and limit losses.

Remaining in the background as potential negatives are ongoing concerns over demand trends,  strengthening  margins, a moderately high stock overhang and concerns over output expansion by producers such as the US, Canada and Brazil. With OPEC still expecting members that had previously overproduced to compensate with future decreases, some members might see their lack of compliance with their prior pledges as a sign of weakening support for the agreement.

In the days ahead the market will anxiously await the Monthly Oil Reports from OPEC and the IEA scheduled for release on January 14th to see how the supply/demand situation is shaping up. A balanced scenario in the first quarter and a strong demand revival in the second half have been baked into values. How quickly and by how much it recovers will be the final arbiter of pricing.

Natural Gas

The weekend again brought forecast revisions that lead to a sharp price change on the Sunday night reopen.  The February contract gapped lower by 10 cents and near the lows of the day at 2.60.  Most of the initial concern emanated from warmer revisions in the back half of the two week forecasts, and as the day wore on the market clawed back most of those losses before rallying late in the session to end nearly 5 cents higher.  Production levels continue to offer underlying support as weekend output hovered near 91 bcf/d, and cold temperatures in China are keeping faith in LNG flows remaining strong for the foreseeable future.

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Charts Courtesy of DTN Prophet X, EIA, Reuters

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