Written Commentary
Price Overview
The petroleum complex continued to show strong gains reflecting expectations that shortages of natural gas will lead to increased use of petroleum products in electricity generation. Forecasts suggesting that the substitution could lead to increased demand of at least 400 tb/d continue to generate the bullish tone. Along with the cautious policy by OPEC+ with respect to output levels, a continuation of inventory tightness into the first quarter of 2022 is looking more likely.
Given the abrupt rally from late August lows of 61.50 basis November to over 82.18 today, some caution on the long side needs to be exercised given the heavy long spec position and the potential for demand to suffer due to the higher prices and potential shortages of power in India and China that could throttle economic growth. In addition, the sharp price spikes in distillate and to a lesser extent gasoline need to be monitored for any sign that underlying disappearance is weakening. This has the potential to lead to a retrenchment in the crack spreads.
While talk continues of the decreased investment in E&P for crude and natural gas, the higher prices might encourage more capital infusion in 2022. Although this likely will not have an impact on near term production, it might affect price expectations on the back months in the second half of 2022, particularly if key producers such as Saudi Arabia and Russia attempt to expand production quicker than currently envisioned to meet expected demand during the first quarter when the deficit is expected to be greatest.
The release of supply/demand data by OPEC on Wednesday followed by the Monthly IEA Report on Thursday should provide insights into macro trends and could create some nervousness in advance of their release, posing resistance at the 83.00 area basis November. Breakdowns below 77.00 are unlikely in the near term as the potential for further inventory tightening ahead of winter provides support.
Natural Gas
The natural gas continued its recent weakness as the November contract settled 22 cents lower at 5.345 and near the days low at 5.308. Weakness again emanated from the pullback in overseas prices, with the assistance of increased output and a spike in wind generation in the US over the weekend. Lower 48 production surpassed 93 bcf/d Saturday and Sunday for the first time since late August and likely exceeds that level again today after late revisions. The market appears cautious as another large storage build is expected this week, with early indications in the 94 bcf area as compared to the average at this time of year of 79. Weather continues to be mild and injections look likely to extend to the end of the month. Colder forecasts in Europe had supported prices overnight, and any additional slowing of the restocking process there will add volatility to US prices. With support near 5.35 tested today, the next level on the downside looks to be 5.25. The first area of resistance moves down to the 5.55 range, while recent volatility has cleared out the upside and positive momentum could quickly ignite a run back to the highs.
Charts Courtesy of DTN Prophet X, EIA, Reuters
The authors of this piece do currently maintain positions in the commodities mentioned within this report.
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