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Energy Brief for November 1

Price Overview

The petroleum complex traded higher today and continued to shrug off news that Iran would return to the JCPOA talks later this month. Support was generated by the release of gasoline and diesel reserves by China to address shortages, and reports that refiners there were ramping up output following a retrenchment earlier this year. The potential for a recovery in import levels of crude and products appeared to confirm ideas that demand for petroleum in China is benefiting from tightness in coal and natural gas as high prices and limited supply lead to substitution of petroleum derivatives.  Petro China indicated that it had boosted its imports of crude oil by 10 percent in October and ramped up diesel supply by as much as 23 percent.  In addition, reports that OPEC+ will continue to ignore calls to increase output beyond the currently slated 400 tb/d helped to underpin values and offset forecasts that the deficit during the fourth quarter might not be as high as previously thought. Reuters indicated OPEC compliance with production cuts was 118 percent in October compared with 114 percent in September, with remaining cuts pledged for OPEC at 1.2 mb.

Although demand issues from COVID persist, the appearance that the effects might be overstated remains in the background as a supportive influence given the recent recovery in India, where demand has surged to pre-pandemic levels ahead of the festival season. Whether demand is inhibited by the higher prices and with supply chain disruptions continues to be a source of uncertainty and a limiting influence in the near term, especially ahead of the Fed meeting which begins Tuesday, and approval of a budget package might pose resistance near the 85.50 level basis December.  Until a more ample supply situation develops, a significant breakdown below support near 81.00 is unlikely given the declining stock situation and appearance that Chinese and Indian demand is reviving.

The DOE report is expected to show crude inventories increasing by 1.0 mb, distillates dropping 1.5 and gasoline off by 1.2, while refinery runs are expected higher by .6 to 85.1 percent.

Natural Gas

Weakness from late last week followed through today with the December contract losing another 24 cents to settle at 5.186.  Weekend weather revisions removed a substantial amount of HDD expectations and initiated the overnight weakness.  Production continues to ramp up, with lower 48 output exceeding 96 bcf/d on Friday and remaining strong over the weekend above 95 bcf, adding selling pressure.  Underlying support was offered by a rebound in overseas prices following unconfirmed reports that Russian exports to Europe had dropped to zero over the weekend, bringing into question previous assurances from Putin regarding restocking.  With early estimates for this weeks injection in the 65 bcf range verses normal at 38, concers over US stock levels continue to dissipate as we near the start of withdrawl season.  LNG flows have been supportive, but continue to be inconsistent as evidenced by a drop below 10.3 bcf yesterday before recovering to near 11 today.  Support at the October lows near 5.07 is in striking distance and could be tested near term.  With volatility likely to remain elevated this winter, initial resistance in the 5.65 to 5.70 area could be short lived if momentum reverses, which could quickly lead to a test the 6.00 level.

The authors of this piece do not currently maintain positions in the commodities mentioned within this report.

Charts Courtesy of DTN Prophet X, EIA, Reuters

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