Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
The petroleum complex traded on the defensive as larger than expected builds in US commercial crude inventories and an unexpected expansion in production levels compounded bearishness surrounding the continuation of China’s strict Covid policies. Prices traded down toward expected support near the 85.50 level basis December crude, before settling lower by 2.20 at 86.71.
The DOE report showed a larger than expected build in commercial crude inventories of 3.9 mb, with 3.6 moving out of the SPR. Gasoline stocks fell .9 while distillate fell .5. Total commercial stocks of crude and products fell .8 mb. Of interest was the increase in domestic production levels of .2 to 12.1 mb/d. Net exports of crude and products were 1.1 mb. Refinery utilization came in at 92.1 percent, up sharply from last week’s level of 90.6. Product exports remained stout at 6.2 mb, with distillate exports rising to 1.4 mb/d from .9 last week. Total disappearance levels were 21.3 mb/d compared to 19.3 mb last year, with gasoline at 9 mb/d compared to 9.3 last year while distillate was 4.32 mb compared to 4.3.
Support likely emerges near the 85.50 level basis December. The cessation of crude sales from the SPR at the end of this month should tighten inventories, which are currently low. While Chinese economic concerns remain in the background, they have been for the most part priced in. A marked pickup in Russian shipments might provide the appearance of supply tightness in the near term but a price cap by the G-7 along with the ban on crude oil exports on December 5th should lead to tightening inventories, with potential over the intermediate term for crude to test the 100 level. The CPI report tomorrow will likely set the early tone, but overall, the fundamental situation in crude is supportive.
Natural Gas
Prices recoiled over the last two sessions after their substantial gap higher on Monday. Yesterday’s 80 cent loss was followed by an additional 27 cent drop today as the December contract settled at 5.865. Weather forecasts have been inconsistent, which has been the initiating force behind the swings in sentiment. Unsubstantiated rumors circulating yesterday suggesting that Freeport would be pushing back their restart date intensified the selloff that saw Monday’s gap easily filled. Follow-through weakness today was justified by the rapid onset of Tropical Storm Nicole, which is expected to make landfall tonight on Florida’s East coast and could lead to extensive demand destruction in the Southeast. Adding to the negative attitude is another large storage build expected tomorrow, with estimates coming in at 84 bcf verses the 5-year average injection of 20. The price flush has left the market within striking distance of the late October lows near 5.35, with the 5.60 area as initial support. Any reports of Freeport being on schedule could lead to a rapid recovery, with minor resistance in the 6.15-6.20 range and not much after that until 6.50.
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