Written Commentary
Price Overview
The petroleum complex worked higher overnight, with the crude oil violating the 71.00 resistance level in the wake of the API numbers late yesterday that showed crude and product inventory drawdowns that were much higher than expected. The strength followed through into the day session with the help of the DOE report as crude ended higher by over 2 dollars at 72.61, while products finished the day with gains in the 3 to 4 cent area. The market is also dealing with the effects of Hurricane Nicholas, which made landfall south of Houston early yesterday as a Category 1 storm. With 40 percent of Gulf production, or approximately 720 tb/d still shut-in, the double whammy looks to further extend the recovery time for GOM operations.
The weekly DOE report confirmed much of what the API had foreshadowed, as crude oil stocks were drawn down by 6.4 mb in contrast to estimates near 3.5. Products were more in line with expectations, with gasoline down 1.9 mb and distillates lower by 1.7 verses estimates at 2.0 and 1.6 respectively. Total production increased by a meager 100 tb to 10.1 mb/d, while utilization crept up .2 to 82.1 percent, both indicative of the continued issues from Ida.
The market looks determined to probe higher, with 73.50 the next area of resistance. The IEA report yesterday indicated that global supplies will likely remain constrained near term, but the agency also indicated that there were signs of improvement on the virus front, and they expect next month to show a sharp demand spike of 1.6 mb/d. This should help limit upside momentum as Gulf production steadily returns and OPEC sticks to their agreement to return supply to the market. The 71.00 level now becomes the first support on a retrenchment.
Natural Gas
Prices continued their march upward as the October contract made a new intraday high for the seventh straight session, reaching a peak at 5.65 before contracting to end the day higher by 20 cents at 5.46. The market continues to be underpinned by the rally in European gas, as a fire on an electrical supply line into Britain today heightened concerns about power supplies and sent gas prices there to new highs. The rally came despite a drop in LNG flows to 9.3 bcf yesterday due to Hurricane Nicholas, as Sabine Pass was temporarily shuttered. Despite the problems, all signs indicate a quick return of flows. With nearly 50 percent of GOM natural gas production still shut-in from Ida, the current storm fallout looks likely to extend recovery times. Although the fundamental setup certainly justifies price strength, it has likely been exacerbated by substantial fund buying due to their large net short position. The next COT report should give a better idea as to the extent of their bail out. Prices pulled back significantly late in the session, as comments from a Russian spokesman suggested that they could solve the European supply shortage if Nord Stream 2 were approved quickly. Initial support has now moved up to the 5.25 level, while an upside target derived from the monthly chart comes in at the highs from February 2014 near 6.50. Tomorrow’s storage report is estimated to show a 76 bcf build compared to the 5-year average of 79.
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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