Written Commentary
Price Overview
The petroleum complex traded under pressure as the rise in coronavirus infections in Europe continues to force a reassessment of demand potential. The market is also awaiting news from OPEC regarding planned output for 2021. Following this week’s rally, calls for deeper cuts have receded for now. A key focus remains the OPEC meeting at the end of the month. Today’s move back below the 37.50 area puts the market at the lower end of our expected trading range in advance of the meeting. Concern seems to be building over the expanding output levels from Libya, who is currently exempt from production cuts. In addition, some weakness might reflect concern over Iraq’s commitment to the agreement. Undoubtedly the weak refinery throughput is limiting the upside movement in prices, with poor margins leading to low global refinery utilization as demand trends remain weak, particularly for jet kero.
The trend in both gasoline and ULSD prices has generally been consistent with that of crude. However movement in the margins against crude have been pronounced, especially in ULSD. The December crack has moved steadily higher from 7.60 on October 20th to 10.70 today, and looks poised to test the 11.50-12.00 area. On a flat price basis the market could weaken down to as low as 1.09 if support at 1.14 per gallon is breached.
Natural Gas
Prices continued their free fall as the December contract lost 10 cents yesterday and followed through this morning to an intraday low at 2.866 before settling lower by more than 5 cents at 2.888. Another large revision downward in HDD expectations in yesterday’s forecasts pressured the market despite a larger than expected draw indicated in the weekly storage report. The 36 bcf decrease was well above trade estimates at 26 and the 5 year average of a 52 bcf build. Positive reaction to the release was brief as selling pressure soon returned. This morning brought yet another decrease in expected HDD over the next two weeks, and also an update to the longer term model that pointed to moderating temperatures through December. Despite production dipping back under 90 bcf/d and LNG flows maintaining there solid performance near 10 bcf/d, this market will not be able to mount a significant recovery until temperatures begin to turn, which does not appear to be a near term likelihood. Expect the heavy selling pressure to abate as decreasing open interest could indicate that a large amount of the managed money longs in the market have been flushed out. The 2.80 level now emerges as support as near term warmth keeps pressure on prices.
Charts Courtesy of DTN Prophet X, EIA, Reuters
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