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Energy Brief for Oct 15

Price Overview

The petroleum complex traded in a firm fashion, ignoring a larger than expected build in crude inventories yesterday. Instead, the market focused on declining inventories in OECD countries, which have reached their lowest levels since 2015.  In the background were strong equity markets that continue to run counter to recurring fears that high energy prices will lead to slower growth.

The Monthly IEA Report released yesterday suggested that the ongoing energy crisis has encouraged a switch to oil that could boost demand by 500 tb/d.  The increase has resulted in an upward revision in their oil demand forecast by 170 tb/d in 2021 to 963 mb/d and in 2022 of 210 tb/d to 99.6 mb/d which is slightly above pre-Covid levels.  Total global oil output in September reached 96 mb/d, off 260 tb/d from the prior month due to losses attributed to Hurricane Ida. Global refinery activity continued to be restrained in the third quarter with refined product balances showing the largest draw in eight years, supporting the strength in refinery margins despite the sharp increase in crude prices.  The IEA reported OECD total industry stocks were drawn down by 28 mb in August to 2,824 mb, 162 mb below pre-Covid five-year averages. Preliminary data for September shows a continued draw of 23 mb in on-land storage and the lowest level since March 2015.  Expectations suggests that OPEC+ will continue to pump 700 tb/d below the expected call for its crude in the 4th quarter leading to a continued decline in stocks.

The DOE report yesterday showed US crude inventories rising by 6.1 mb, gasoline falling 2 mb while distillate was unchanged.  Total stocks excluding the SPR rose 4.9 mb. Domestic crude production was indicated at 11.4 mb. Total product supplied fell to 19.9 mb compared to 21.5 in the prior week.  Refinery utilization fell by 3.1 to 86.7 percent.

We expect the uncertain outlook for economic growth and expanding crude demand to contain breakdowns to the 77.00 level basis November.  Resistance is likely near 83.00 on questions regarding the Iranian nuclear negotiations and trends in economic growth.  A key consideration will be the longer-term forecasts for temperatures this winter in key consuming areas such as Europe, the US and China.

Natural Gas

The natural gas market has seen mixed trade to end the week, with prices spiking higher Thursday after the storage report, but then finding steady selling interest during today’s session to end nearly 28 cents lower at 5.41.  The 81 bcf injection reported yesterday was substantially below estimates near 94, with blame quickly placed on low renewable generation pulling gas last week.  Assistance on the upside was provided by LNG flows, which have returned to the 11 bcf/d level following the return of Cove Point on Tuesday after three weeks of maintenance.  The pullback today seemed to be a reality check as wind generation is expected to have a substantial recovery next week, with storage injections likely to be above average through the end of the month.  Despite the home grown explanations for the market moves, they still mirrored overseas prices as the shortages there remain the energy market headline maker.  When colder temperatures develop, either here or overseas, there might not be much to impede a run back to the contract highs.  5.65 and 5.80 look to be resistance levels, with the 5.30-5.35 range still offering key support on a settlement basis.

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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