Energy Commentary - 2/24/2022
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CRUDE OIL
Internal fundamental forces in the crude oil market are of little importance today! In fact, yesterday’s large jump in API crude oil stocks is of no interest to the market today. Furthermore, the weekly EIA data this morning will be of little importance to the trade. In our opinion, the energy markets are factoring in an energy embargo of Russia and even if that does not happen in the end, the trade is likely to overreact in the coming 36 hours. However, OPEC has suggested they see no immediate need to respond despite oil prices above $100 and that is a very bullish development. From a technical perspective, the crude oil market may not run out of buying fuel as quickly as would be expected given that the last COT positioning report showed a net spec and fund long nearly 200,000 contracts below the last 2-years high net long! While Russian energy exports might be embargoed by large portion of the world, we doubt countries without significant domestic oil production will halt their imports from Russia. In fact, even if aggressive energy embargoes are widespread, they are likely to be circumvented with Russia exporting fuel to China. Remember that Russian President Putin and the Chinese signed a long-term natural gas contract when Putin visited China during the Olympics. It should also be noted that reports estimate the Russian central bank has built its currency and gold reserves up to a level that could finance sustained sanctions which restrict exports. In December, Russian crude oil production was 46.2 million tonnes with a month over month increase of 3.6% and a year-over-year gain of 8.6%. Russian December exports totaled 19.7 million tonnes which is 11.4% above November. In other words, the Russians appear to have ramped up exports ahead of their attack. According to the Russians, the sanctions are unpleasant but fundamentally change nothing! In conclusion, sanctions are unlikely to deter further Russian imperialism and therefore the bear camp in crude oil has a very difficult path ahead. This week's Reuters poll projects crude stocks to increase by 800,000 barrels and for the US refinery operating rate to decline by 0.3%. After the close, however, the API survey showed that US crude oil stocks had a weekly increase of 5.983 million barrels which was far larger than trade forecasts.
PRODUCT MARKETS
As indicated in crude oil coverage, the direction of RBOB prices is almost exclusively set to be determined by the actions of Vladimir Putin. While geopolitical opinion-based trades are highly suspicious, a large portion of the world does not expect Putin to stop at his current position. From a technical perspective, the gasoline market enters the Ukraine takeover with a very modest net spec and fund long and that indicates the market has significant additional buying powder. The most recent COT net spec and fund long was only 73,521 contracts with the 2-year high in the net spec long up at 100,000 contracts. The highest net spec and fund long in the past 2 years was 138,235 contracts. While the US Administration implemented legislation beneficial to biofuel (partly for buffering prices), that is a very minor negative to petroleum prices and is likely to be fully discounted by the trade. This week's Reuters poll pegs gasoline stocks to decline by 1.2 million barrels and a draw of that magnitude will likely expand the deficit versus year ago stock levels. The API survey showed a weekly increase in US gasoline stocks of 427,000 barrels which contrasted with market expectations for a moderate weekly decline. Certainly, the favorable biofuel policy decisions by the administration are negative from a supply perspective, while a notable expansion of biodiesel will not take place immediately. If this week's US refinery utilization rate is down by 0.3%, that will put the US refinery activity at only 85% utilization which will likely result in further tightening of gasoline and ULSD stocks ahead. Uptrend channel support in April gasoline today is $2.970. As indicated yesterday, the global diesel market was already tight and the mere discussion of disrupting Russian diesel exports can send ULSD $0.18 above the early trade of $3.01. Russian diesel fuel and gas oil exports to Europe amount to 900,000 barrels per day, with ULSD exports to Europe coming in around 550,000 barrels per day. It should also be noted that Russia supplies 55% of European diesel imports and roughly 20% of the world’s supply. According to many analysts replacing Russian energy in the current condition is highly unlikely. Therefore, the fundamental path of least resistance remains up. The API survey showed a weekly decline in US distillate stocks of 985,000 barrels which was a smaller decline that trade forecasts.
PETROLEUM MARKET IDEAS
Going forward, the energy trade is likely to continue to factor in the prospect of a full block of Russian oil exports to countries participating in sanctions. In fact, internal fundamentals are unlikely to have sustained impact on prices for the rest of this week. Uptrend channel support in April crude oil today is $97.01 and increases to $98.53 on Friday. Upside targeting in WTI, and Brent are very difficult to predict until the breadth of sanctions is known. Therefore, WTI targeting could be $103.00. Targeting in April gasoline today is $3.15 and targeting in April ULSD is $3.17.
NATURAL GAS
On one hand, we are surprised in the lack of significant upside extension in natural gas prices given the prospect of a disruption of Russian LNG flow to the West. However, a portion of the trade thinks embargoes of gas shipments at this time will result in more damage to Europe than to the Russians. Like the petroleum complex, the natural gas market should continue to have a "Russian put" especially with the most recent COT positioning report showing a large “NET SPEC AND FUND SHORT”. Furthermore, the threat of a reduction in gas flow to Europe would likely spark a large jump in US Gulf LNG prices as bidding for export supply expands sharply. In fact, British wholesale weekend gas prices jumped 10.7% yesterday in anticipation of an ongoing threat of lost supply. While significant and sustained cold patterns in US Great Plains, China, and Europe are not expected, buyers of LNG are likely to step up buying directly ahead. It should also be noted that Chinese gas prices reached record levels off cold and aggressive bidding for supply by the importers. While this week's Reuters poll projects EIA storage to fall by 145 BCF that compares to a draw last week of 190 BCF and to year ago levels of 324 BCF. As if the bull camp needed additional bullish ammunition, cold temperatures are forecast for the US Midwest, Europe (next week), and China. As in the petroleum markets, the Russian situation looks to continue to provide significant lift to natural gas prices.
