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Oil Complex


It was a brutal day for both the crude producer and refiners as aggressive selling interest, with little dry powder left from specs, pushed the entire complex lower on a magnification of yesterday’s less than bullish API stats. Overall, the DOE reported a cumulative build of 3 million barrels this week, with the addition of small oil builds reported at Cushing and in the SPR.

Downward momentum started early, and did not let up as the day progressed. Eventually the Nov WTI contract closed at $84.22/barrel, or -$5.01 day-over-day. Interestingly there really was not a material change in near term spreads with Dec WTI also suffering a sharp loss (-$4.89) closing at $82.55. Products fared even worse than WTI with Nov diesel down $7.46/barrel while Nov RBOB fell in the middle of the two at -$6.81/barrel. Crack spreads (3-2-1 specifically) which had hovered near decadal highs from mid-July to mid-Sept have cratered of late, with today’s move magnifying the shift. For context the 3-2-1 crack was flat to higher than last year until Sept 19th, and since then a freefall has pulled refining margins to sub 2021 levels.

Broader economic worries seem to be a fundamental catalyst, of course assuming today’s move had anything to do with fundamentals. Although U.S. equities were back on the mend today, and U.S. dollar strength was pared, more headlines are mounting about macro-economic resilience in what remains a hyper inflationary environment.

From our perspective today’s changes may simply have been a product of two power forces combining to weigh on a market which had seen very little resistance on a move from $65 to $95. First there are producers which have been given the gift of higher prices heading into Q4, with risk mitigation having been sporadic and/or sparse on the move higher. This group of market participants may have chosen to take some chips off the table at levels they have not been able to achieve for forward Cal strips in quite some time. The odds of this being a catalyst seem high in our view as losses were greater than $3/barrel through Cal 25, and even the 2026 strip took a $2.93 hit. The second group of market participants likely participating in today’s sharp correction were sidelined speculative bears. Many had been forced to exit positions over the past couple of months as losses mounted, and after the market stalled and began treading water below last Wednesday’s intraday highs, this group likely saw today’s inventory data as a chance to pile back in to short positions.

As for the DOE stats they came in as follows. Crude inventory decreased by 2.2 million barrels, inclusive of a small 0.1 million barrel build at Cushing. Distillate stocks were down 1.3 million barrels, which was bullish relative to yesterday’s API stats, but then there was gasoline which posted a chunky 6.5 million barrel build. The SPR posted a 0.3 million barrel build offsetting last week’s small draw, leaving the past couple of weeks neutral in that category. Interestingly there was not a material change in product exports to pin today’s total complex change on, and thus it will be important to see if there is follow through next week, or if today’s stats were merely an anomaly.

Beyond the front few months losses were still material. Cal 24 WTI fell back below the $80 mark for the first time since Labor Day, with a loss of $4.18 leading to a closing price of $76.68. Cal 25 WTI gave back $3.40/barrel which caused another round number resistance level to fail. Today’s Cal 25 WTI close of $76.68 is the lowest since August 24th. The aforementioned change in Cal 26 generated a closing price of $68.25.

While it was not a headline worth throwing into the discussion on today’s declines, there was an update on the Exxon Guyana project (Payara). Headlines today stated that Exxon, and its partners in the project (HESS and CNOOC) planned to begin loading production in November. S&P Global reported that 1 MMbl are expected to be loaded on November 10-11, and then another 1 MMbl is expected to be loaded on Nov 20-21.

Natural Gas


Crude markets definitely bucked the mainstream narrative on Wednesday, and the NYMEX natural gas market tried to do the same. However, for NYMEX natural gas the move higher lost momentum as the day progressed. For crude markets the predominant narrative has been a bullish one all year, and for natural gas the opposite has been true. Today the Nov NYMEX contract traded up to $3.055/MMBtu intraday with spot prices at the Hub leading the way. By the afternoon bids dried up and the nearby contract relaxed back down to a closing price of $2.962, or +$0.013 day-over-day.

Like the crude market, today’s rally could have been a signal for producers to increase protection before year end, with this sector of the market almost always having a bigger axe than the spec community, which has seen fundamentals consistently run bullish to the prevailing narrative. Tomorrow the EIA inventory data will provide a test for market bears with mild weather and flat week-over-week wind generation on their side. Expectations for the storage number tomorrow sit in the low to mid 90s (Bcf) which would compare to the same week last year when a seasonal record 126 Bcf injection was reported.

Upward momentum across the curve ran out of momentum today with all tenors flashing considerably stronger numbers in A.M. trading before fading in to the close. Cal 24 picked up just under a penny closing at $3.396, after trading as high as $3.44 earlier in the day. Cal 25 was the strongest tenor today with a gain of $0.017 and a closing price of $3.98, while contango was reduced as a result of Cal 26 moving $0.027 in the opposite direction closing at $4.02.

A closer look at tomorrow’s EIA projections shows a couple of key points. First the market is hinging its expectations for a larger W/W build (+90 last week) on a sample of daily facilities which injected slightly more than the prior week, while ignoring a sample of weekly facilities which injected slightly less W/W. Regionally, the largest Y/Y surplus contraction is poised to come from the South Central yet again. This region, and a modeled sample of facility data, points to a build of 25-30 Bcf, which would compare to the same week last year when 42 Bcf was injected. Second in line for material surplus contraction is the Midwest which is also poised to deliver a build in the 25-30 Bcf range, which would compare to the same week last year when a 37 Bcf build was reported.

While the market patiently awaits tomorrow’s inventory data there is a weather dynamic quietly threatening the prevailing bearish narrative on this winter and the next Cal strip. Currently the 1-5 day forecast is somewhere between normal to slightly colder than normal, and when this tenor was in the 11-15 day forecast early last week it was materially warmer than normal (bearish). While the current 6-10 day period shows a material warm up, model output last night and at mid-day today showed a progression back to more normal temps by mid-to-late October. One rationale for the bearish market narrative is the odds of a warmer than normal winter, and while it is far too early to make a definitive call on winter temps (as if it is ever possible) cooler than normal temps East of the Mississippi in October are not the signal desired from those wishing to sell aggressively to what has been a stubbornly resilient front of the curve.