Morning Update 02.23.21

Overview

Energies are lower after having risen to new highs overnight fueled by a weaker U.S. dollar, demand hopes given vaccine rollouts, supply outages in the U.S., and strong backwardation in oil and inflationary pressures. 

The strong backwardation is giving incentive to holding positions in the front end of the commodity. A weak U.S. dollar and increasing sentiment that a period of high inflation is approaching after a strong global economic recovery and government stimulus were also boosting commodity prices, sources said. (Platts) 

As of Monday, 600 MBPD of U.S. crude production was still seen offline. At the peak last week, 3.8 MMBPD was said to be offline. Yet, U.S. crude exports were also lower, having fallen to 2.3 MMBPD in the week ended February 19. The week prior, they were seen at 3.9 MMBPD. Negative arbitrage economics are seen impacting U.S. exports out of the Gulf. (Platts) 

A Platts survey is calling for U.S. crude supplies to fall by 4.8 MMBBL, which would put stocks at a deficit to the 5-year average for the first time since March 27. Gasoline supplies are seen falling 2.8 MMBBL, while distillate supplies are seen falling 3.5 MMBBL. Refinery runs are seen shrinking by 3.8% in this week's stats. 

Gasoline/RB prices were likely driven higher Monday by news that the EPA agrees with an appellate court decision, which is seen leading to fewer refinery exemptions from biofuel standards. The EPA will not act on any pending refinery exemptions until after the Supreme Court has reviewed the case in July. (Reuters) 

On the negative side for gasoline, Apple Mobility says that last week, U.S. driving activity fell by 7% to the lowest level since May 15 and that put activity 16% below year ago levels. (Platts) 

Yesterday, Platts said that they will start incorporating WTI Midland MEH into Dated Brent pricing. This is seen partially due to declining output from the North Sea. WTI will be reflected in dated Brent from July 2022 cargo deliveries and the basis of the benchmark will be changed to a delivered basis. Output of the five crude grades underpinning Dated Brent has fallen and is often below 1 MMBPD, less than 1% of global supply. Platts said including WTI Midland should add about 500 MBPD, and WTI Midland has become a core part of the North Sea market with similar characteristics to the existing five grades. Dated Brent is used to set more than two-thirds of the world’s physical oil prices and, through a complex web of associated derivatives, ultimately influences where Brent oil futures trade. (Reuters/Bloomberg) 

Bank analysts continue to issue upbeat forecasts for oil prices. Morgan Stanley sees Brent at $70/bbl in the third quarter on an improving market. Morgan Stanley said "in non-OECD countries, refineries are already running as hard as before COVID-19." The bank also raised its outlook for Brent prices in the second quarter to $65 per barrel from $55, and hiked its fourth-quarter forecast to $65 from $60. Bank of America said Brent prices could temporarily spike to $70 per barrel in the second quarter. (Reuters)

Technicals

Prices made new highs overnight, but prices have retreated by over $1.50. Does this signal some concern prices may be overbought here? Momentum looks neutral for the energies. 

April WTI has resistance at 6273-78 , which is below the overnight high of 6300. Support is seen at 6127-31, tested with a low of 6123. Support lies then at 6078-79. 

May Brent futures see support at 6407-12 via the 60 minute chart. Resistance lies at 6540-50, which is below the high of 6583. Above this resistance comes in at 6600-10. 

April RB support is seen at 1.9142, then at 1.8986-88. Resistance is seen at 1.9452, then at 1.9600, which are the highs from yesterday and today. 

April ULSD sees support at 1.8391-1.8402. There may be some light support at 1.8500. Resistance comes in at 1.8770-76, then at today's high of 1.8855. 

Natural Gas

NG has slipped 5 cents as supply is rising and demand is falling after the winter storms wreaked havoc last week. 

Platts pegged U.S. NG demand yesterday at 111 BCF, which was down 27% from the peak seen last week. Demand is seen shrinking further to below 100 BCF by the weekend. While supply was seen having risen to 85.8 BCF Monday, which is up from the low 70's seen last week. Next day Henry Hub prices fell Monday by $2 to $2.84, Platts reported. NatGasWeather sees a rather mild/warm setup for March 5-9 that makes the pattern bearish overall. (NGI) 

However, Tudor, Pickering is upbeat about the prospects for NG storage. Lingering storm impacts equate to around 1.5 BCFD of incremental tightness for a market we already estimate is undersupplied by about 3 BCFD. Their latest modeling has gas storage exiting Q1’21 at 1.5 TCF, or 16% lower versus the 5-year average. With the firm’s projected refill seen peaking at just 3.1 TCF on strip pricing, they see Henry Hub needing to rise to $3.500 this summer to drive sufficient gas-to-coal switching to balance the market. (NGI) 

One colleague believes that the dip on Monday morning was as good as we will get in the near term. He suggested a move back up due to the large storage number expected this week. He sees a possible move back to the $3.10's. EBW Analytics Group analysts expect “monster draws” to be reported this week and next, eliminating a quarter of the gas in storage to the tune of around 550 BCF. (NGI) 

Technically, NG is looking soft with negative momentum. Support lies below at 2.822-23. Resistance lies above at 2.956-2.962.

Disclaimer 

Commodity trading involves risks, and you should fully understand those risks prior to trading. Liquidity Energy LLC, and its affiliates assume no liability for the use of any information contained herein. Neither the information, nor any opinion expressed shall be construed as an offer to buy or sell any futures or options on futures contracts. Information contained herein was obtained from sources believed to be reliable, but is not guaranteed as to its accuracy. Any opinions expressed herein are subject to change without notice, are that of the individual, and not necessarily the opinion of Liquidity Energy.