Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex continued to move sharply higher, boosted by a variety of influences with the most critical being active coverage against existing commitments given the disruption caused by sanctions on Russian banks and other institutions amid an intensifying Ukraine conflict, and little sign that Russia is willing to make concessions. Values settled over 7 dollars per barrel higher basis April WTI.
In the background was the failure of OPEC+ to adjust their production quotas more than the 400 tb/d mandated previously and the appearance that Russia was guiding the policy of the producer group to avoid mitigating the impact on energy supplies by the Ukrainian conflict and sanctions. Surprisingly, the US, Europe, and Japan failed to exert diplomatic pressure on the organization despite previous alliances and the dire economic consequences that the high energy prices might have on the global economy. In addition, the organization failed to recognize the potential consequences of their actions on encouraging longer range production and prospective supplies from outside OPEC and the impact on demand longer term from the sharply higher valuations of crude and products and increasing competitiveness of renewable energy sources. The greatest impact of higher prices will likely be on Europe, whereby the US and Canadian production will likely benefit given the wide spectrum of energy resources in these countries, which have to some extent benefited from the higher prices to the detriment of consumers. The release of Strategic Oil stocks totaling 60 million barrels by International Energy Agency member countries appeared to have little impact given the other more critical considerations.
Some concern was expressed over the DOE stats. The report showed crude inventories falling by 2.6 mb. Gasoline inventories were off by .5 mb while distillate inventories declined by .6. Total crude and product stocks excluding the SPR fell by 3.9 mb. Crude stocks at Cushing got tighter, falling by 1 mb to 22.6, the lowest level since September of 2018. US Strategic Petroleum Reserve inventories fell to 580 mb, the lowest since August 2002 and did not reflect the release made yesterday. It should be noted that in 2002 the SPR was seen more as a necessity than a backup, as it is now, due to the increase in US production levels since that time period due to shale.
The failure of the UAE and Saudi Arabia to push for a larger production increase puts the onus on key global consumers of Russian crude to cut their usage, and tends to underpin values. Potential for prices to advance toward the 120 area exists given the fear that sanctions on Russian oil exports might still be enacted to ramp up diplomatic pressure even further.
Natural Gas
Prices finally started to garner support from the Ukrainian conflict as European prices registered substantial gains over the last couple of sessions that could not be ignored. The strength was not as pronounced as in the petroleum complex, but yesterday saw gains of 17 cents followed up by a 19 cent increase today to settle at 4.762 basis April. Intensifying sanctions against Russia and moves by Germany to decrease their reliance on Russian energy sources supported values. US fundamentals lacked justification for the strength, with weather forecasts showing some potential cooling in the back half of the forecasts but nothing substantial. A slow return of production levels from last week’s freeze-offs was offset by an equal drop in LNG flows. Tomorrow’s storage report is expected to show a 138 bcf draw compared to the 5 year average of 98. Geopolitical tensions will continue to create volatility, and with the settlement through the 4.70 area today there is little resistance above here until the 5.00 level. Initial support on a retrenchment should surface in the 4.70-4.72 area.
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