Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex continued its upward climb, with April WTI reaching as high as 130.50 overnight, which was a gain of $14.82 per barrel. Gasoline surged by 34.64 cents per gallon to $3.89 and diesel jumped 46.10 cents to $4.23. Values subsequently retreated toward unchanged levels where support again emerged.
The early strength was linked to ideas that the US, Europe, and Japan were prepared to sanction Russian exports of oil, which had not been explicitly targeted previously. The potential that as much as 5 mb could be removed from the market touched off panic buying. The realization that some major importers such as China and India would not adopt the sanctions, along with the appearance that Germany was not prepared to participate, encouraged the ensuing pullback.
The market is searching for replacement barrels for Russian exports and has yet to find them, leading to concerns over tightness and shortages. The failure of Saudi Arabia and the UAE to increase production despite the underperformance of some members has exposed European dependence on Russian wet barrels. Whether Western powers can find the barrels remains questionable given that Iran is balking at an agreement to lift sanctions imposed by the US, and that potential supply from Venezuela is still under US sanctions. Some workarounds are being discussed, with India ONGC Videsh working to sell Venezuelan cargoes to the US market in exchange for debt owed by its Venezuelan joint ventures. It does not appear that these will be enough to avoid the growing tightness. Potential sanctions on Russian oil imports into the US will likely be inconsequential given that they are not substantial, but the action might have a psychological impact on prices.
The DOE report on Wednesday is expected to show crude inventories lower by .8 mb, distillates off 1.7 and gasoline down 1.9 mb. Refinery utilization is expected to increase .4 to 88.1 percent.
Natural Gas
The natural gas market repeated its recent pattern, moving up in overnight trade following sharply higher crude oil and overseas prices, then pulled back as the day session progressed and attention turned to US fundamentals. The April contract made a new high at 5.184 before ending the session 18 cents lower at 4.833. The weather ensembles were mixed coming out of the weekend, with expectations maintained for below normal temperatures into the end of this week, although a warming trend developed in the back of the 15 day forecasts that decreased overall demand expectations. Production crept higher over the weekend, and looks likely to surpass 94 bcf today after late cycle revisions. The gains were offset by coinciding improvement in LNG flows that reached 12.9 bcf today. With another all-time high reaced on European prices today, the market should have enough underlying support to maintain the 4.60 level near term. The likely continuation of extreme volatility would likely target the 5.50 area on the next spike higher.
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