Morning Energy: A Corrective Bias Throughout the Complex if Russia is Quiet
While the crude oil market has seen repeated technical and fundamental signs of a shift in sentiment away from the bull camp, the market has also managed to regularly discount those bearish stories. Certainly, the decision to raise output by 400,000 barrels per day from OPEC plus was widely anticipated but that does allow for more supply to come to the market in the weeks and months ahead. However, it should be noted that Russia, since the restraint agreement was signed, has returned 1.8 million barrels of oil to the marketplace and an embargo of oil would be very significant! From the Russian front, the Yamal pipeline was shut down with no flow in either direction earlier in the week, and overnight an eastern flow returned. In short, European hopes that Russia would begin a westerly flow of LNG are dashed. There could be some geopolitical support for crude oil today following news of a foiled drone attack on the UAE and from news that an oil production ship exploded off the coast of Nigeria. There are also storm alerts in a key Russian export terminal and the prospect of an embargo of Russian oil supplies remains in the forefront. From a technical perspective, the March crude oil contract forged a contract high yesterday, but at times had retrenched by more than $2.50 from that high which ruptured bullish sentiment. Therefore, the market seemed to run into resistance at the psychological $90.00 level. However, the EIA report did show a draw in crude oil stocks that was not as big as the API survey, but the smaller than expected change this week did result in an expansion of the year-over-year crude stocks deficit. It should also be noted that US strategic petroleum reserve stocks reached the lowest level since 2002 and all major categories of EIA stocks posted declines on the week. Furthermore, Belarus has been ordered to halt any oil transit through the country and fertilizer on a ship bound for delivery to Lithuania has been redirected to deliver that supply to Belarus. In other words, it seems like Russia is pulling out all the economic stops to achieve their goals. The goal could be a land grab of the Ukraine, preventing the eastern expansion of NATO, ending, or loosening sanctions, and/or long-term advantageous oil and gas contracts with the West. EIA crude stocks fell 1.047 million barrels and are 60.516 million barrels below year ago levels. Also, crude stocks stand 42.201 million barrels below the five-year average. Crude oil imports for the week stood at 7.085 million barrels per day compared to 6.236 million barrels the previous week. The refinery operating rate was 86.70% down, 1.00% from last week compared to 82.30% last year and the five-year average of 88.12%.
PRODUCT MARKETS
While the gasoline contract managed a new contract high yesterday, it also fell back from that high as if the $2.60 level was some form of psychological resistance. However, the trade might have been prompted to bank profits following a 2.1-million-barrel build in EIA gasoline stocks. On the other hand, despite the inflow to inventories of 2.1 million barrels and an inflow of gasoline imports current gasoline stocks returned to a deficit of 2.1 million barrels versus year ago levels. On the other hand, Singapore weekly fuel stocks into February 2nd rose 1.8% on a week over week basis. EIA gasoline stocks rose 2.119 million barrels and are 2.116 million barrels below last year and 4.539 million below the five-year average. Average total gasoline demand for the past four weeks was up 5.16% compared to last year. Gasoline imports came in at 433,000 barrels per day compared to 314,000 barrels the previous week. Unfortunately for the bull camp, gasoline stocks have reached the highest level since April 2020. As indicated late last week, we suggest those long should begin to implement profit stops and or implement hedge coverage in the form of bear put spreads. We see a critical uptrend channel support line in March gasoline at $2.5010 with closer in pivot point pricing seen at $2.5470. Given that our support levels are far away from the current market, we are anticipating massive volatility! The range from Tuesday through Wednesday in RBOB was $0.10. Not to be left out, the diesel market also forged a new contract high, but held those gains better than other markets in the energy complex. Cold weather in the eastern US combined with a severe winter storm, a weaker dollar and further expansion of annual deficits in distillate and diesel stocks leave ULSD with the strongest fundamentals in the energy complex. The range in ULSD from Tuesday through Wednesday was $0.12. EIA distillate stocks fell 2.410 million barrels and stand at 40.094 million barrels below last year and 28.788 million below the five-year average. Distillate imports came in at 250,000 barrels per day compared to 226,000 barrels the previous week. Average total distillate demand for the past four weeks was up 11.30% compared to last year.
NATURAL GAS
The natural gas market exploded for one of the largest gains ever yesterday and likely drafted nearly all its lift from the ebb and flow of the Russian situation. In fact, US futures prices on Wednesday rose by 15% and therefore a sizable corrective setback is understandable. On the other hand, Russia has orchestrated several economic maneuvers which appear to turn up the heat on Europe and those actions move the needle further in the direction of conflict and further hold back of supply. While reports are constantly changing, the latest indicates the Yamal pipeline has been halted completely. Eastern European consumers had hoped the pipeline halt would be a precursor to the beginning of a (reversal of flow) Western flow of gas, but as of this writing it appears gas is flowing eastward again. In fact, Bloomberg overnight has produced views that Russia cannot be replaced as the primary supplier of gas to Europe and that should underpin prices. Other supportive overnight developments are predictions that India’s city/urban gas demand will grow as that country expands distribution networks and the bull camp is also emboldened by reports that US LNG has become more profitable into Europe. Unfortunately for the bull camp, US weather has shifted negative with warmer temperatures in the West. This week's Reuters poll pegs natural gas storage in the US to decline by 297 BCF to 232 BCF. As indicated in other sectors, of the energy complex we anticipate significant volatility ahead. The path of least resistance is pointing upward, and we suggest traders with long positions consider the purchase of bear put spreads as protection and or for staying power. The next logical upside target in March gas is $5.75, but the best support we see on the charts is a long way down at $5.088.
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MARKET IDEAS
While we leave the big trend pointing up in the energy complex, we suspect the "easy money" has been made and the risk to longs has increased greatly. Therefore, we see volatility expanding dramatically with the potential for a major washout if the Russian situation begins to moderate and or US equities forge a sentiment busting washout. Accounting for significant volatility we see uptrend channel support in the March crude oil contract down at $85.45, support in gasoline at $2.5470 and support at $2.71 in March ULSD.