Market Update 4-3-2023

Crude?is?up?$4.40????RB?is?up?9.16?cents????ULSD?is?up?+8.14?cents

Overview

Energies are much higher, gapping up over the weekend as OPEC+ announced a surprise oil production cut.

The cut currently is seen as amounting to 1.16 MMBPD. The total reduction in crude output by OPEC+ will be 1.6 MMBPD by July, as per Bloomberg reporting. The actual reduction in supply may be smaller than the advertised volumes of around 1.6 MMBPD, assuming that OPEC+ sticks with current reference levels for the cuts. Most OPEC+ members, like Iraq and Kazakhstan, are already producing significantly below their present quotas as they contend with under-investment and operational disruptions, and so may not need to make further curbs. RBC’s Croft estimated the cuts would amount to about 700 MBPD from the core OPEC group. The Saudis said Sunday that the cuts were a "precautionary measure aimed at supporting the stability of the oil markets."?Analysts point out that the Saudis are determined to keep oil prices high enough to fund ambitious mega-projects linked to Crown Prince Mohammed bin Salman's Vision 2030 plan to overhaul the economy.?Back in October, Nigeria's Petroleum Minister had said :" the group “wants prices around $90.” The cut came as surprise, as evidenced by the fact that all fourteen traders and analysts polled last week by Bloomberg predicted no change. They were taking their lead from the Saudi Energy Minister, who had said last month that the current OPEC+ production targets are “here to stay for the rest of the year, period.” While traders and analysts had expected crude to be in surplus in the second quarter with Asian refineries down for maintenance and French refineries shut due to strikes, they now expect the OPEC+ cuts to tighten markets ahead of summer, the high-demand season. (Reuters)

Other nations announcing cuts on state media were Iraq saying that it would reduce production by 211 MBPD, the United Arab Emirates by 144 MBPD, Kuwait by 128 MBPD, Kazakhstan by 78 MBPD, Algeria by 48 MBPD and Oman by 40 MBPD. As for Russia's cuts, Russia’s Deputy Prime Minister Alexander Novak meanwhile said Moscow would extend a voluntary cut of 500 MBPD until the end of the year, according to remarks carried by the state news agency Tass. Previously, Russia had said that they would cut 500 MBPD from March until June. (AP Finance)

The following are some reactions to the cut:?On Sunday, the White House said the OPEC+ decision to cut oil production was wasn’t advisable under current market conditions. (Bloomberg) Several analysts have pointed out that OPEC+ made their decision less concerned about a response from U.S. shale producers, due to fading US shale oil growth. An official at a South Korean refiner said the cut was "bad news" for oil buyers and OPEC was seeking to "protect their profit" against concerns of a global economic slowdown. The supply cut would drive up crude prices just as weakening economies depress fuel demand and prices, squeezing refiners' profits, the South Korean refining official and a Chinese trader said. At the same time, European refiners' demand for Middle East crude has risen - especially for Basrah Heavy and Oman crudes - to replace Russian oil banned by the European Union since December, traders and an Indian refining official said. (Reuters) The WTI Brent arb has weakened quite a bit since making highs on Friday.

The OPEC+ production cut may be greater than thought --given the following news : Kuwait has already notified buyers it will cut exports to keep more crude for its Al Zour refinery, and Saudi Aramco is ramping up operations at its Jizan refinery. (Reuters) This will weaken cracks further than the softness that would come from a reduction in crude supply and the symbiotic rise in product prices, that many would believe will hurt demand for the products.

Some of the updraft from OPEC+'s decision may be negated by news accounts that Japan has begun purchasing Russian crude oil above the $60-a-barrel cap, breaking with Western allies thanks to an exception authorized by the United States. The nations granted an exception to the $60-a-barrel cap through September for oil purchased by Japan. And in the first two months of this year, Japan bought around 748 MMBBL of Russian oil for approximately $70 a barrel. (FoxBusiness)

In addition to the Japan news, Iraq’s semi-autonomous Kurdistan region said it has reached an agreement with the federal government to resume oil exports through Turkey this week. Iraq’s oil ministry in Baghdad said on Sunday that it hopes to reach an agreement to resume oil exports soon. The ministry said that it will announce the deal when “a final agreement is reached in accordance with the new understandings” for oil exports. (Bloomberg) The amount of exports through Turkey amounted to 440 MBPD.

Several analysts raised their oil price forecasts. Goldman raised their year end 2023 and 2024 Brent forecasts by $5. December 2023 Brent is seen at $95, December 2024 at $100.?Pickering Energy Partners investment head said Sunday that OPEC+'s cut could lift global oil prices by $10 per barrel. Prices are currently up $5 from Friday's settlement and were up as much as $6 on the high. “Any unexpected 1 MMBPD change in supply or demand conditions over the course of a year can impact prices between $20 and $25 per barrel,”?the head of commodity and derivatives research at BofA said. (Bloomberg/Reuters) ING says "before the announcement, we were forecasting Brent to average US$97/bbl over 2H23. However, we now expect the market to average US$101/bbl over this period."

The?Baker?Hughes?Oil?rig?count?fell?by?1?unit?in?Friday's?report.

The CFTC Commitment of Traders report for the week ended March 28, showed money managers added significant length to their RB & WTI positions on the CME. RB net length rose by 14,301 contracts. The RB length was due to longs added. WTI net positions rose by 48,774 contracts on ICE/CME combined as shorts were covered on the CME mostly.

Technicals

Price action and momentum are supportive as the crude oil and RB contracts have gapped up over the weekend. Citigroup has the following assessment of price action going forward : "Given extremely low managed money positioning, low open interest and high volatility, the markets can expect a price overshoot just as Fed tightening and banking turmoil led prices to fall two weeks ago far more than balances warranted.” The highs seen overnight were made right upon the opening last night. The one cautionary signal for the bulls is the upper bollinger band that was tested overnight in Rb and the crude oils.

WTI has the upper bollinger intersecting at 81.41. Chart based resistance is seen at 82.38-48. Support is seen at 77.46-47. The gap created over the weekend goes down to 75.72.

RB has its gap down to 2.7208. The upper bollinger lies at 2.7887. Chart based support comes in at the overnight low at 2.7432-39 and then at 2.7182-2.7208. Resistance comes in at 2.8122, then at the overnight high at 2.8232-57.

ULSD on the DC chart has its low today of 2.6830 equal to the expired April high seen Friday. Support below that lies at 2.6345-63. Resistance comes in at the overnight high at 2.7642-66.

Brent spot futures have a gap down to 79.80. The upper bollinger intersects at 86.31. Support is seen at 82.52-61 and resistance at 86.90-95.

Natural?Gas?-?NG?is?down?9.9?cents

NG is lower as weekend weather forecasts dropped more demand. WSJ cites the stubborn NG storage surplus also as contributing to the pullback in NG prices today.

The?Baker?Hughes?NG?rig?count?seen?Friday?saw?a?drop?of?2?units.

CFTC data issued Friday shows that money managers added enough longs to switch their net position to being net long 2,000 contracts in the week ended Tuesday March 28. Notable with regard to open interest is the very large amount of contracts open in the front month May 2023 contract on the CME. Open interest as of Friday was said to be 385,046 contracts, which Reuters says is the most since March 2020. This reinforces our comment of last week that a battle should see its final narrative played out very soon, especially given the double index roll that takes place come Friday.

As noted by Clear View Energy Partners about a third of U.S. gas production is associated gas - produced from oil wells,"?"This production is unlikely to decline given current oil prices." This is impeding a rally in NG as demand shrinks given the season and feed gas demand having maxed out for now. "Gas prices are begging the market to cut back on supply, amid falling U.S. consumption and constrained LNG export options,"?an energy strategist at Morningstar Research Services LLC said. (Nasdaq.com) Refinitiv sees demand falling this week to 104.1 BCF/d from last week's 110.6 BCF/d. Next week's demand is seen at 103.8 BCF/d.

WSJ commentary Friday suggested that the rally for Ng was supported by firmer TTF pricing. TTF prices today have risen to their best value in 3 weeks and have filled a gap to the upside left from mid-March from 48.230 to 48.050. Current pricing is over those prices at 49.915. Bloomberg cites colder weather and higher gas consumption for the rise. That, together with a combination of supply risks — from some French nuclear maintenance extensions to delays at the Calcasieu Pass export facility in the US — pushed prices higher, according to consultant Energy Aspects Ltd. Bloomberg adds :"Gas has become more attractive again compared with coal and oil products for some power plants and industrial users." Some industry watchers, including Goldman Sachs Group Inc. and Vitol Group, have warned gas prices may more than double from current levels on demand recovery.

As we wrote Friday, there are analysts looking for a stab at $2.00 and below for NG pricing. As The Street writes : "" We believe that $2.00 natural gas is as unsustainable as $10.00 natural gas. Yet, it might take some time for the pessimism and the supply glut to work itself out. We can't rule out the front month touching $1.60 as it did in 2016, but it isn't likely. Also, we've noticed many of the same analysts that believed gas was heading to $15.00 or $20.00 last year are now calling for $1.50 gas.""???Attached is a monthly NG chart, that shows over the past 14 years, prices have often rebounded from lows made in March or April.

Technically, the euphoria of a key reversal on the May daily NG chart has been lost. May NG has even made a fresh contract low overnight threatening near $2.00. The low seen overnight was made on the opening last night. The May NG daily contract shows oversold momentum, while that seen in the DC chart remains positive. Support is seen at the recent low at 1.944. Resistance comes in at 2.238-2.241.

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