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Energy Brief for Oct 20

Price Overview

The petroleum complex traded on both sides of unchanged before closing firm. Early pressure on values was linked to yesterday’s API release which showed a larger than expected stock build in crude inventories of 3.3 mb, which was later countered by the DOE release that showed a draw of .4 mb in commercial crude inventories compared to expectations for a build of 2.2.

Concerns remain in the background that energy shortages in China are impacting economic growth. In addition, the shortages of coal and natural gas and the associated spike in prices is proving challenging for India as their balance of trade deficit expands and record prices restrain consumption trends. These two countries account for over 20 percent of global oil demand and a retrenchment in economic activity could have longer term implications for growth if shortages are not avoided with additional supplies. Whether Middle East producers move to expand output given the steady draw-down in global inventories continues to be a potential source of uncertainty.    

The DOE report showed crude inventories fell by 2.1 mb, gasoline dropped 5.4 mb, and distillate were down 3.9.  Total stocks were down 9.6. mb.  Total product supplied rebounded strongly from last week reaching 21.8 mb compared to 19.9, with other oils, a calculated residual, accounting for half of the increase. 

Today’s strength on declining inventories has taken values to overbought levels.  Nevertheless, a strong bearish influence appears to be lacking as the Northern Hemisphere winter approaches and supply chain challenges persist.  Currently, the La Nina appears to be shading forecasts toward a warmer than normal winter in the US.  We expect the uncertain outlook for economic growth and expanding crude demand outside of China to contain any pullbacks to the 77.00 level basis December, with resistance likely near current levels above 83.00.  

Natural Gas

Prices have managed to find some footing over the last 24 hours after the market withstood strong selling pressure early in the week.  The December contract gained nearly 10 cents today to settle at 5.447 after putting in an intraday low at 5.07 yesterday.  The extension of mild temperature forecast through the end of the month coupled with strong renewable generation has undercut demand, while continued difficulty in maintaining maximum LNG flows added to the weakness.  The recovery today reflected a drop in production as output continues to struggle in the 92 bcf/d range, along with a recovery in overseas LNG prices after recent retrenchment.  Tomorrow’s storage report is expected to show an injection near 90 bcf compared to the 5-year average of 69.  Upside follow through could target the 5.59 level, which represents a gap on the chart from Monday’s re-open as well as a 50 percent retracement of the break since last Thursday.  Support on any further breakdown should surface near 5.20 and beyond that at 5.07.

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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