Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex backed off from the strong gains evident the past two days, which had seen crude surging as high as 81.62 basis April before backing off today to settle at 81.26 for a loss of 22 cents on profit taking. Recent strength was linked to Ukrainian drone attacks on Russian refining facilities, -optimistic demand forecasts and low inventory levels indicated by the International Energy Agency.
The drone attacks and related damage are expected to cut Russian gasoline production as much as 10 percent. The increase in the IEA forecast for global demand by 110 tb/d from the prior month, while not substantial, is significant because it further tightens the supply/demand balance at a time when commercial on-land inventories fell 38 mb in February to their lowest level since 2016. Offsetting the drawdown on land is a surge of oil afloat. Trade dislocations due to rerouting of Russian barrels and the attacks in the Red Sea saw these inventories rise by 115 mb in February alone. The IEA reported that at 1.9 billion barrels, oil on water hit its second highest level since the height of the COVID-19 pandemic.
Key highlights of the IEA report:
- Global oil demand rising by a higher than expected 1.7 mb/d in the first quarter of 2024 on an improved outlook for the US and increased ship bunkering. Although 2024 growth was revised up by 110 tb/d, the pace of expansion will slow by 1 to 1.3 mbd as demand growth slows back to historical trends as efficiency gains and EV’s reduce use
- Expansion in global supplies by .8 mb/d in 2024 compared to the forecast in February of an increase of 1.7 due to weather induced shutdowns in January and the extension of curbs into the 2nd quarter by OPEC+
- Refinery crude runs rising to a peak of 85.6 mb/d in August and for the year are expected to average 83.5 on improving refining margins and new capacity in the Middle East, China, and Africa.
- Global observed inventories surged by 47.1 mb/d in February reflecting a strong build in offshore stocks, while onshore stocks declined.
The IEA report was constructive, suggesting stocks in the latter part of the year will be tighter than previously expected with the potential for a slight deficit if OPEC+ maintains its cuts into the end of the year. The IEA outlook could shift the current trading range upward from the 74-80 range into the 77-84 area for prompt crude.
Natural Gas
The last two sessions saw similar ranges, with strength yesterday driven by a larger than expected storage draw and rumors that Freeport would be restarting train 3, which has been down since January. All those gains were relinquished today as the market closed 8.6 cents lower at 1.655. Reality remains the hindrance to rally attempts, as time runs out for any significant winter weather events with storage a substantial 629 bcf, or 37 percent, above the 5-year average despite yesterday’s number. Freeport’s whispered restart also did not materialize today, but the .5 bcf gain in loadings will be a minor supportive influence, especially with multiple other terminals undergoing maintenance with current flows under 13 bcf/d. The last three sessions have seen a similar low near 1.65, and it appears only a matter of time before that level is taken out, with the contract low at 1.60 the next target. Support below there would be at the March contract low of 1.511. The last two sessions also saw the 9-day moving average tested, making a settlement above that level, currently 1.783, necessary to build momentum that could flush out short covering.
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