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Energy Brief for November 17

Price Overview

The petroleum complex traded sharply lower as the market continued to deal with demand uncertainty and the potential for increasing supply. The DOE report provided some support, but it was overwhelmed by ideas that demand growth might be softening due to increases in global Covid infections along with the appearance that shale production in the US is being favorably impacted by the higher prices.  Suggestions that the US might be willing to try and reign in higher prices through an SPR release weighed on sentiment and led to increased hedge selling and speculative liquidation that carried values back below the 80.00 area basis December. 

In the background was yesterday’s IEA Monthly report. They suggested that while the oil market remains tight, a reprieve might be on the horizon due to rising supplies. They indicated that high price levels will lead to US production rising in 2022, accounting for about 60 percent of its forecast of 1.9 mb/d for non-OPEC supply growth. The report prompted comments from OPEC’s Secretary General that the group sees signs of an oil supply surplus building from next month, adding that the group will have to be “very, very, very cautious.”

The DOE report showed commercial crude oil inventories falling by 2.1 mb despite a release of 3.2 mb from the Strategic Petroleum Reserve.  These were part of sales previously approved by Congress and are not considered emergency releases.  Analysts have suggested that the administration could consider speeding up such approved sales rather than resorting to an emergency declaration.  Gasoline stocks fell by .7 and distillate dropped by .8 mb.  Crude exports surged by 3.6 mb while imports were stable at 3.1. Net exports of crude and products were 145 tb compared to 1.3 mb last week. Cushing stocks were stable at 26.6 but are still at historically low levels as we approach the expiration of the December crude on Friday.  

The market is in a delicate balance, with declining inventory levels in key consuming countries offset by concerns over a rising interest rates.  Uncertainty regarding releases from the SPR along with the restart of Iranian nuclear negotiations will be counterbalanced by the strong control OPEC+ has over production which might be more in evidence at their meeting on December 2nd.  Prices are generally weaker during the first quarter but given the sizable backwardation this might be discounted.  We continue to believe that pressure on values much below 75.00 basis January should be limited while resistance likely arises near the 82.00-83.00 until a more concise reading of demand is received. 

Natural Gas

The market has been a roller coaster ride over the last few sessions, with prices spiking up to an  intraday high at 5.394 on the December contract before dropping out of the sky to settle 36 cents lower today at 4.816.  Reports yesterday that German regulators had suspended licensing for the Nord Stream 2 pipeline, possibly delaying approval until March of 2022, spiked overseas values and spilled over to the US market.  Prices began to deflate late in yesterday’s session when afternoon weather runs lowered HDD expectations, only to be followed by further moderation in this mornings runs.  The extent of the pullback was somewhat surprising given that production dropped below 95 bcf the last two days and there are signs that Freeport is beginning to recover volumes with overall loadings back above 11 bcf/d.  Weather continues to be the most important input, as cooler temperatures will be necessary to reignite prices.  Today’s action has brought the 100 day moving average near 4.81 back in sight, and a settlement below there could lead to a test of the 4.50 level, and possibly 4.00 if things get carried away.  Initial resistance looks to be near 5.16, and with multiple issues overseas continuing to support values, any swing to colder temperatures could see the market quickly retrace to the 5.50 area.  Tomorrow’s storage report is expected to show an injection of 25 bcf verses a 5 year average draw of 12. 

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

Futures and options trading involve significant risk of loss and may not be suitable for everyone.  Therefore, carefully consider whether such trading is suitable for you in light of your financial condition.  The information and comments contained herein is provided by ADMIS and in no way should be construed to be information provided by ADM.  The author of this report did not have a financial interest in any of the contracts discussed in this report at the time the report was prepared.  The information provided is designed to assist in your analysis and evaluation of the futures and options markets.  However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.

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