Energy Brief for Jan 13.23
by market analysts Stephen Platt and Mike McElroy
The petroleum complex continued to work higher as support linked to optimism over demand prospects continued to encourage buying and short covering. Reports that travel has already surged in China ahead of the Lunar New Year supported hopes that the relaxation of COVID regulations will have a marked impact on demand. Expectations that the US will pursue a more modest interest rate policy in reaction to an easing in inflationary trends is also limiting talk of imminent recession this year.
Despite the penetration of resistance near the 77.50 level basis February, we remain cautious regarding higher prices. Good resistance should be apparent near the 100-day moving average at 81.35. The recovery in crude inventories and to a lesser extent gasoline suggests that demand has weakened. Although refinery closures following the Christmas freeze have played a role, we remain doubtful it was the only factor. Stocks are currently within the five-year range, while gasoline has recovered on a slowing in net export levels for crude and products. If this trend continues, it might signal the liquidation of secondary inventories along with better than anticipated Russian availability. The ample stocks that this would suggest should work against further upside movement to prices in the near term.
The mid-week bounce that saw prices reach an intraday high at 3.946 was unable to find follow-through as the market made new lows for the move again today before settling with a loss of 27.6 cents at 3.419. An expected trend downward to more normal temperatures in late January was unable to overcome the negative overall bias. Rumors at midweek that Freeport would be pushing their restart date back to the second half of February were not surprising but kept downside pressure on the market none the less. Yesterday’s storage report was surprising, showing an 11 bcf build compared to the 5-year average draw of 157, marking the first January storage increase on record and adding to the bearish tone. As each day passes, trade becomes more comfortable with the idea that current storage levels will be enough to get through any cold phases that may develop over the remainder of winter. The close below 3.50 opens the path for a test of the psychological 3-dollar level, with July of 2021 the last time prices were this low. Despite the current weakness, the market remains oversold, and any forecast change could see a snap in prices that would find minor resistance at 3.77 and again near 4 dollars, but nothing substantial to slow a rebound until the 4.70 area which marks a 38 percent retracement of the break since mid-December.
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