Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil succumbed to concerted liquidation pressure, falling by over 2 dollars today and almost 6 dollars over the past two sessions as waning fears over a Middle East supply disruption and weakening consumption trends in the US and China led to long liquidation. The API report yesterday afternoon also weighed on values as it showed a large build in crude inventories of 11.9 mb/d while gasoline inventories fell by .4 and distillate rose by .4 mb. The DOE report was not released due to a system upgrade and will be resumed next week.
The speed of the decline has caught many participants flat footed and might be linked to ideas that the Saudis and other allies are hoping to pursue a wider peace initiative with Israel. This was being discussed between the US and Israel prior to the attack by Hamas on October 7th. The fact that supplies have thus far not been disrupted as many had expected appears to have led to the forced liquidation of positions built up following the terrorist strike. In the background are reports that OPEC crude exports are up by as much 1 mb/d since August due to seasonally lower domestic demand, which added to the weakness. Economic concerns are also apparent with respect to China, the US and Europe. Although Chinese crude imports surged in October; concern over deteriorating domestic demand related to weak exports is weighing on the economy. In the US, the EIA now expects total petroleum consumption to fall by 300 tb/d in 2023 to 20.1 mb/d compared to a previous forecast projecting an increase of 300 tb/d.
The Saudi’s willingness to undertake additional production cuts to support values will be watched closely along with how aggressive the US is at refilling the SPR given the marked decline in prices. In addition, stocks rebuilding in 2024 remains a distinct possibility along with the potential for a recovery in Iraqi production levels once the Turkish pipeline opens. Although the Gaza conflict remains in the background, the lack of escalation is limiting buying interest, with the market focusing on macro developments including the dollar, interest rates and rising debt levels. We are not as negative on the economy as prices currently reflect. Look for support to develop at these levels on supply uncertainty and low inventories.
Natural Gas
Weakness continued in the natural gas as the contract lows at 3.216 were taken out yesterday without much of a battle. Additional downside pressure was seen today with the December settling with a loss of 3.4 cents at 3.106. The selling continued to be derived from a mixture of record production in the face of lackluster weather demand. In the background as an additional negative influence was weakness in overseas prices, as Europe is also experiencing mild temperatures and record storage levels heading into winter. The EIA released their STEO (Short Term Energy Outlook) yesterday showing that they expect production this winter to be maintained near 105 bcf/d and they are also looking for a mild demand season overall. They estimated end-of-withdrawal season stocks at 2,000 bcf which is 21 percent above the 5-year average. All of this points to further weakness until cold weather arrives. The 3.06 area offers minor support with the 3-dollar level likely tested but offering staunch support. The rapid decline leaves little immediately above the market, with minor resistance in the 3.22-3.25 range and then all the way up at the 9-day moving average currently at 3.38. A swing to colder forecasts could quickly test Monday’s chart gap at 3.452.
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