Written Commentary
Price Overview
The petroleum complex traded down to a low of 79.78 basis December crude before attracting modest support. Recent weakness that was traced to the dollar and a surge in interest rates was also influenced by OPEC’s Monthly Report released yesterday. It showed a downward revision in demand for the fourth quarter, reflecting slowing in the Chinese and Indian economies along with the effects of higher prices. For 2021, the forecast indicated a decline to 99.49 mb/d in the fourth quarter, down 330 tb/d from last month’s estimates, and put demand for all of 2021 at 96.44 mb/d compared to 90.79 in 2020.
The slowing pushed back the expected surpassing of pre-Covid levels into the third quarter of 2022 and tended to support OPEC+ efforts to maintain increases of 400 tb into April. For 2022, OPEC sees demand reaching 100.59 mb/d. With supply chain challenges and an uncertain capital investment environment restraining production, it is anticipated that total growth for non-OPEC production in 2022 will increase by the second quarter to 66.21 from 63.28 mb in the second quarter of 2021.
The market appears to be in a delicate balance with declining inventory levels in key consuming countries offset by concerns over a rising interest rate environment and the possibility that it will constrain growth. Uncertainty regarding releases from the SPR along with the restart of Iranian nuclear negotiations will be counterbalanced by the strong control Saudi Arabia, other Middle East producers and Russia have over production policy. Prices are generally weaker during the first quarter but given the sizable backwardation this might be discounted. Pressure on values much below 80.00 could be limited while resistance should be apparent near the 85.00 level until a more concise reading of demand is received. The EIA will be releasing their monthly report on Tuesday, November 16th and it will be watched closely for their take on the demand and inventory situations.
Natural Gas
The market was supported by overseas geopolitical news yesterday after threats by Belarus to cut off European gas supplies from the Yamal pipeline due to a border dispute spiked prices nearly 7 percent. The gains were brief, with prices pulling back to test mid-week lows during today’s session after statements from Russian President Putin eased concerns. A substantial pickup in wind generation today also pressured prices, with total output nearing record levels and displacing in excess of 8 bcf of natural gas demand. With production settling in to the 95-96 bcf/d range, the market will likely have trouble mounting a substantial rally until cooler temperatures arrive. The 100 day moving average was tested again today, with prices settling just above there at 4.791 basis December. The quick return to weakness likely signals a near term probe lower, which could find trendline support drawn off of the October and November lows that comes in near 4.65. Initial resistance looks to be near 5.16 and above there at 5.30 which marks a 50 percent retracement of the break since late last week.
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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