Energy Brief for Oct 8
The petroleum complex continued to trade in a volatile fashion with yesterday’s quick decline to the 75.00 level attracting broad based buying interest as values tested the 80.00 level early today before attracting pre-weekend profit taking. Ideas that possible shortages of natural gas, particularly in Asia, will lead to increased use of petroleum products in electricity generation continues to underpin values. Although talk continues of an emergency release from the US Strategic Petroleum Reserve, which was the main reason for yesterday’s sharp selloff, the impact has been limited by the recognition that the DOE has not made a decision at this time and is keeping all options open for dealing with a tight energy market. Talk of an export ban on US crude oil has also circulated but we do not feel such a draconian move is being considered at this time.
Surprisingly, the strong rally in crude and products the past two days developed despite a steady tone in natural gas where reports that Russia will be increasing availability continue to circulate. It appears other factors might be at work in crude. Foremost is growing concern that OPEC+ is having difficulty reaching production targets. Since the beginning of this year, the market had been working on the assumption that their planned production increases would be enough to cap international prices given demand trends. However, limited capital investment in new wells along with the spike in gas prices has increased demand for crude unexpectedly at a time when most OPEC+ producers other than Saudi Arabia and the UAE have seen export levels decline. These producers will likely continue to be challenged by limited investment amid the global pivot away from fossil fuels towards greener energy.
The release of supply/demand data by OPEC on Wednesday Oct 13th followed by the Monthly IEA Report on Thursday should provide insights into macro trends and could create some nervousness in advance of their release, which should support valuations in the 77.00-80.00 range. Potential for further inventory tightening ahead of winter might provide the basis for a move toward the 83.00 area, while a sharp contraction in Asian economic growth has potential to derail this outlook.
The market followed through on the retrenchment that started Wednesday in the wake of comments from Vladimir Putin that Russia could increase European shipments of natural gas to ease the shortages there. The November contract traded down to a low at 5.393 yesterday before recovering into the end of the session. The weekly storage release showed an injection of 118 bcf, well above expectations, but was unable to garner much additional selling interest as prices had already plummeted over a dollar in the prior 24 hours. Today’s trade was calm in comparison to recent action, with the November settling near 11 cents lower on the day at 5.565. The market now begins to look toward winter weather. Overseas stocks remain low, while the US appears headed closer to normal levels as mild weather continues to bolster stock builds. If a mild winter develops, all of this preemptive chaos will have been for naught, but as we saw last February, even a relatively short stretch of abnormally cold weather can lead to major fallout. Look for the 5.35 level to maintain support as LNG flows look set to improve in the coming weeks and Putin’s assurances await the realities. Initial resistance comes in at 5.85, but with the upside range traversed multiple times in the last two weeks, any 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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