Market Update 2-8-2023

Crude oil is up 95 cents    ULSD is up 5.62 cents   RB is up 1.86 cents

Overview

Energies are higher on the back of a surprise draw in crude supplies in API data and on the back of Fed Chairman Powell's comments yesterday.

Powell's comments have spurred European equities to 9 month highs today. Fed Chair Powell said "the disinflationary process has begun" and that " wages are moderating". His comments were interpreted as a less hawkish stance for Fed policy. (YahooFinance/Reuters)

API                Forecast      Actual

Crude Oil         +1.8          -2.184

Gasoline          +1.4         +5.261

Distillate          +0.2         +1.109

Cushing          +0.887      +0.178

Runs              +0.5%         n/av

Today's rally in energies comes even as oil loadings have partially resumed at the key Ceyhan export terminal in Turkey. One of three bays for Iraq’s oil is open, according to SOMO, the Iraqi state crude-marketing firm. The other two are still being inspected. Yet, exports from the part of the port that handles flows from the BTC pipeline are yet to resume, according to a BP spokeswoman. The BTC pipeline mainly takes Azeri crude, which comes from Azerbaijan. (Bloomberg)

Demand optimism from China is touted in a Bloomberg article. They cite Energy Aspects analysis, which has Chinese refinery output rising to 14.5 MMBPD in the first half of this year. This compares to last year's run rate of 13.6 MMBPD. Last month, the IEA forecast runs to rise to 14.4 MMBPD. The rise in runs is seen partially due to continued strong exports of oil products. Contrary to a comment we had seen recently suggesting that February's oil product exports might fall due to a need to replenish domestic supplies, OilChem analysis sees the exports of jet, gasoline and diesel rising by 7% in February from January. Adding to the positive demand narrative, according to Bloomberg NEF, traffic congestion in major Chinese cities has tripled since the end of the holiday.

In yesterday's Short Term Energy Outlook (STEO), the EIA raised their price forecasts for oil prices. They see WTI in 2023 averaging $77.84, up from last month's estimate of $77.18. Brent is seen averaging $83.63 in 2023, up from January's estimate of $83.10. The estimates for crude pricing for 2024 were left unchanged from last month's forecast. The EIA left their global production estimate for 2023 unchanged at 101.10 MMBPD. The global crude oil and liquid fuels production estimate for next year was lowered to 102.61 from last month's estimate of 102.83 MMBPD. The EIA's global demand estimates for 2023 and 2024 were basically left unchanged. U.S. crude supply is forecast to average 12.49 MMBPD in 2023, up from the 12.41 MMBPD forecast last month. The EIA's estimate for U.S. crude production for 2024 was lowered to 12.65 MMBPD from 12.81 MMBPD seen last month.

Technicals

Momentums for the energies have turned positive.

WTI has resistance in spot futures at 79.16-25 and support at 76.55-60.

March RB support lies at 2.4400-2.4425. Resistance is seen at 2.4930-44 and then at 2.5145-56.

ULSD for March sees support at 2.9200-15 and then at 2.8911-25. Resistance comes in at 2.9949-84.

Natural Gas

NG is lower in the face of continued weak near term weather demand. Despite the last two days of rebound, Gelber’s analysts warned that “it’s a bit too soon to suggest that NYMEX gas futures prices have bottomed.” (investing.com) Next day cash Henry Hub NG pricing remains under $2.50.

Gelber says : "if the major weather forecast models show signs of backpedaling on the mid-to-late February pattern shift or shorten its duration as they have pretty much all winter long, or if production rises back above 100 BCF/d, or if volumes to Freeport are interrupted; NYMEX gas futures could test new lows or possibly sink to the $2.00/MMBtu area." This is contrary to the overall market view we had seen in news wire accounts 24 hours ago of a slow return of production lost to freeze-offs, cooler weather possibly in late February/early March and expectations of a ramping up of Freeport's LNG facility.

In their Short Term Energy Outlook (STEO), the EIA lowered their NG price forecasts for 2023 and 2024 by quite a lot. They see U.S. NG prices averaging $3.40 in 2023. This is down 31% from last month's estimate of $4.90. The EIA said that inventories did not draw as much as expected, hence the price drop. They see end of March 2023 NG storage at 1.809 TCF. This is up from last month's figure of 1.521 TCF. They forecast end of October 2023 NG storage to be at 3.818 TCF. In their STEO, the EIA forecast next year's NG price to be $4.04, down 15.8% from January's estimate of $4.80. NG output in the U.S. for 2023 was left unchanged at 100.3 BCF/d in this month's forecast versus last month's. The EIA raised their demand forecast for this year and next by 0.3 BCF/d. Demand this year is now seen at 87.04 BCF/d, up from January's estimate of 86.74 BCF/d. Next year, U.S. NG demand is seen at 86.10 BCF/d, up from January's estimate of 85.79 BCF/d. Demand in 2022 was said to have averaged 88.6 BCF/d. The EIA said that this year's lower demand stems from power generators using more renewables, and lower industrial demand as a result of an expected drop in manufacturing activity,

Even in the face of the rally seen yesterday, there were skeptics. One analyst said :" 5 days a winter does not make". Another analyst suggested that sub-$2 pricing might lie ahead. Based on their latest macro natural gas model, his firm's analysis sees a need for a shock to the system to slow production growth. In that vein, a colleague says that producers are looking at one another, waiting for someone else to be the first to cut output. Raymond James is forecasting that the rig count in the U.S. will fall to 750 from 813 in 2023 due to lower NG prices. “We could see shut-ins later this year as storage approaches full levels,” the brokerage says. Raymond James analysts lowered their price forecast for the year down to an average of $2.80/MMbtu. Warm weather and the slow return of Freeport's LNG facility have dented their outlook. (NGI/WSJ)

TTF prices have slipped to near 54 Euros/Mwh today, having traded basically sideways in a narrow range for the past almost 2 weeks. Inventories in Europe are ample. On that basis, Morgan Stanley cut its forecast for prices in the third quarter of 2023 to 47 Euros/Mwh — a price last seen in August 2021 — compared with their forecast of 64 Euros/Mwh estimated a month ago. Morgan Stanley expects gas reserves, which are about 70% full, to end the heating season at 59%. That’s double the levels of last year. Storage sites could be filled up months in advance if the region doesn’t slow down purchases, Morgan Stanley said. That could result in too much gas floating around in the market. Countries in “our European perimeter would reach 100% inventory fill as early as August if LNG imports continue at the current pace,” the bank said. Yet, we have seen other analysts suggesting a possible rebound in demand from power generators and industrial users given the drop in prices from the high seen last August of 340 Euros/Mwh. (Bloomberg)

The Crude to NG ratio is trading at a value not seen since August 2013. And according to one analyst, the current value of crude oil's multiple relative to NG of over 30 times is not going to last. They point out that the ratio has only been above 25X for about 40 days in the past five years. Over the last 4 years, the ratio basically was between 10 and 25 as per the attached weekly chart.

Technically the NG DC chart has a stepladder up look despite the pullback today. Momentum is positive. But for now it seems as if in the very near term the range is set between the low seen last week of 2.341 and the high from the first of the month at 2.780. We see some support even at 2.423-2.431 and resistance at 2.612-2.615, which was tested overnight with a high of 2.657. Some pressure on the front end of the NG curve may result from the double index fund roll that is happening. Funds are rolling length from March to May, as indicated by the drop in March's CME open interest yesterday of 28,000 contracts and the increase in May open interest of 18,000 contracts.

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