** Quarterly Overview**

Q3 Overview 2022 – Q4 Outlook 2022 PDF

Q3-2022 Quarterly Commodity Spreadsheet

Energy

Energy Weekly Component Report PDF-11.30.2022

Energy Weekly Component Report Spreadsheet-11.30.2022

Comments:

January coal for delivery in Rotterdam moved 13.58% higher, while January NYMEX natural gas futures fell 10.09% higher since November 23. The volatile natural gas market rallied over 16% last week.

January NYMEX crude oil moved 3.35% higher, while February Brent futures moved 2.08% to the upside since the previous report. January gasoline futures edged 0.35% lower since November 23. Gasoline underperformed raw crude oil, pushing the gasoline crack spreads 14.52% lower. January heating oil futures kept pace with the raw crude oil with a 2.65% gain. Distillate cracks edged 1.02% higher over the past week. Ethanol prices for January delivery edged 0.11% lower since the previous report. The potential for a price cap on Russian crude oil at the $60-$70 per barrel level is weighing on crude oil, but the US administration’s plans to buy oil for the SPR at $70 could create a floor for the energy commodity. However, the administration adjusted its plans saying it would buy oil if the price stabilized at the $70 level, trying to game the market if a sharper correction occurs.

The API and EIA reported substantial 7.85 million- and 12.6-million-barrel declines in crude oil inventories for the week ending on November 25. The API said gasoline stocks rose 2.85 million barrels, while the EIA reported a 2.80-million-barrel increase. Distillate stockpiles rose 4.01 and 3.50 million barrels, respectively. The SPR released 1.40 million crude oil barrels for the week ending on November 25. The US SPR continues to fall and was at the 389.1-million-barrel level as of November 25, the lowest level since March 1984. On December 31, 2021, the SPR stood at the 594.7-million-barrel-level, 52.8% above the level on November 25.

As I wrote in previous reports:

“We could see the energy commodity find a bottom when the SPR releases end unless there are production increases or reserve releases from other countries.”

With the mid-term elections in the rearview mirror, we could see SPR sales stop over the coming weeks. Meanwhile, distillate stockpiles in the US are at lows as the temperatures drop. The administration has put pressure on US oil companies, after they reported record profits in Q3, threatening higher taxes if they do not return some of the earnings to US consumers. Crude oil and energy remain political footballs. Gridlock in Washington will likely continue the finger pointing, while the prices remain at the highest in years and the US SPR is at the lowest level in decades. The upcoming December 4 OPEC meeting will be virtual, and we could see volatility going into the meeting as the cartel decides if economic concerns over China cause another production cut with prices around the $80 per barrel level.

January natural gas prices corrected lower over the past week, closing at the $6.930 per MMBtu level on November 30, down 10.09% since last week. The EIA will report natural gas inventory data for the week ending on November 25, on Thursday, December 1. The consensus estimates are for a 41 bcf decline in stocks. Stockpiles fell by 80 bcf, in the first withdrawal of the 2022/2023 peak season for the week ending on November 18. Natural gas in storage across the US was 1.7% under last year’s level and 1.1% below the five-year average. Natural gas stockpiles across the US peaked at 3.644 tcf on November 11, the exact level at the peak in 2021.

The end of the injection season is typically a very volatile time in the natural gas futures arena. Expect lots of action in the natural gas futures arena. I remain cautiously bullish, using tight stops on long risk positions and following short-term trends in the wild natural gas futures arena.

The number of US oil rigs operating was up four at 627 for the week ending on November 25, while natural gas rigs were down two from the previous week at the 155 level. The European winter presents unique challenges for natural gas and coal supplies, given Russia’s cutbacks to “unfriendly” countries supporting Ukraine. Expect lots of volatility in the energy sector during the winter of 2022/2023.

Trends:

Short-term trends in crude oil, gasoline, and heating oil re in consolidation. Gasoline and distillate crack spreads remain elevated. Natural gas volatility remains high and unpredictable and was in a bearish trend on November 16 but that could change in the blink of an eye. Approach all energy markets with a risk-reward plan as two-way price variance is likely to continue. The price action in coal remains bearish. Ethanol reflects gasoline and corn prices in the US.  

The natural gas market shifted its focus to the winter season, with supply concerns plaguing Europe. The move to over $10 for the first time in fourteen years and drop below $5 are examples of the volatile fireworks that are likely on the horizon. Nearby NYMEX natural gas prices have traded in a $6.39 range in 2022, and an even wider band in Europe. Keep an eye on European prices for clues about the path of least resistance of NYMEX natural gas futures. Be careful in energy, but I remain mostly bullish given the geopolitical landscape. According to President Biden, the mid-term elections will not cause the administration to reconsider its energy policy, which is bullish for traditional energy prices as OPEC and Russia continue to dictate the worldwide production that determines the path of least resistance of oil prices.

As I wrote last week:

“I believe crude oil is close to a significant bottom, and natural gas volatility will remain very high over the coming weeks and months.”

The coming OPEC meeting could cause significant volatility in the oil futures arena.

Recommendations:

  • We are long the OIH ETF. I rate the oil services product a hold at $304.85 per share.
  • We are long PBR, the Brazilian oil company. I rate the stock a hold at $11.69 per share.
  • We are long APA Corporation, and I rate the stock a hold at $46.85 per share.
  • I favor the leading oil companies, including CVX, BP, XOM, and the XLE ETF product. The prices have rallied significantly in 2022, and higher highs are likely on the horizon. I am holding a portfolio of these companies at current prices but have no specific price recommendations as I rate them a hold instead of a buy at current levels. I will add to long positions at lower levels. I have left plenty of room to add if prices spike lower.
  • I am using BOIL and KOLD for short-term natural gas trades on the long and short side. These products are leveraged, so they are only appropriate for short-term trades. Use price and time stops when dipping a toe into the natural gas arena on the long or short side. Be very careful in the wild natural gas market!
  • We are long the VDE ETF at the $110 level. VDE closed at $127.68 on November 30.

A Final Note

As we head into the final month of 2022, the OPEC and Fed meetings will determine the path of least resistance of markets across all asset classes. Meanwhile, demonstrations in China could set the stage for an economic comeback in the world’s second-leading economy if the government eases the COVID-19 protocols. In a year where the leading stock market indices have posted significant losses, end-of-the-year tax loss selling could impact markets over the coming weeks.

Commodity prices have come down from the 2022 highs, but the potential for future rallies is high. The geopolitical landscape remains tense as the war in Ukraine continues to threaten peace in Europe and causes the divide between the US/NATO and Russia to widen. China could hold the key to the global economy over the coming weeks if the government does not react harshly to the current demonstrations. Meanwhile, the dust has yet to settle in the crypto arena as the saga of the FTX bankruptcy continues to grip the asset class.

I expect another volatile year in the commodities asset class in 2023. I am a buyer of dips in December and will maintain core long positions into 2023.

Thank you for your continued support!

Warm regards,

Andy Hecht

 

 

Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal.  This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.