Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil failed to follow-through on early strength linked to the Gaza crisis despite ongoing fear of the potential for an expanding conflict. Reports that Houthi rebels launched missiles from Yemen against US ships and Israel only added to the tense atmosphere. Background support was apparent from reports the US is looking to purchase 6 million barrels for the Strategic Petroleum Reserve in December and January at 79.00 per barrel from the 70.00 price previously offered, but still well below current prices near 90.00 a barrel. Calls by Iran for OPEC members to embargo oil shipments to Israel were not responded to by other Middle East producers while the release of two American hostages by Hamas might have helped undercut the early strength.
The energy situation could be impacted by macro forces in the weeks ahead. While no one can say whether significant disruptions will occur to oil exports from the Middle East, the Saudi’s are straddling the fence and intent on maintaining market stability. Ideas that the incursion by Hamas with Iranian backing was linked to a possible peace deal between Israel and more moderate members of the Arab community, including Saudi Arabia, suggests that such an agreement might be lying in the weeds but with a much longer timeline. Given the recent flight to hard assets with gold showing sharp gains, the fear factor remains pronounced and looks poised to underpin values. The tightness in crude inventory levels makes the situation more dire, particularly if users push ahead purchases due to the uncertain supply environment. Emerging market demand could suffer from dollar strength and higher interest rates, which will eventually be reflected along with supply expansion due to the higher prices. Despite the low stocks at Cushing and fears of a short squeeze, the November-December crude backwardation went out with a whimper at around 1.00 premium November.
Natural Gas
Downside pressure continued through the second half of the week as the November contract lost 5.8 cents today to settle at 2.899 while the December, which will take over as front month next week, lost 6.8 cents to end at 3.258. Selling intensified after the weekly storage report yesterday, as the 97 bcf build was well above expectations near 80. Prices lost 10 cents immediately after the release and have not seen much of an uptick since. Impressive production levels above 104 bcf/d continued, offering additional weak bias. Weather has continued to be a net negative as well, but some cooling expected early in November could slow price declines next week if it continues to materialize. Momentum should carry prices down to a test of the lows at 2.796, with minor support on the way near 2.85. If the market can find footing, resistance now arises at 3 dollars and then in the 3.08-3.10 range.
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