The petroleum complex traded sharply lower reflecting Saudi assurances that they would maintain a market balance amid heightened Mideast tensions. In addition the unexpected build in US crude and gasoline inventories suggests that an adequate supply situation exists despite the extraordinary supply shortfalls from Venezuela, Iran, and the OPEC+ production cuts. Fear that it may reflect a deteriorating demand situation along with the recognition of expanding US production might have exascerbated the concerns. Although OPEC appears intent on supporting prices through production restraint, the belief exists that market share for the major producers will suffer as long as increases in US production continue. The meeting in late June will shed light on their ability to maintain a semblance of unity which could get increasingly difficult if Russia and Iraq see a need to maintain or expand production given increasing competition from non-OPEC producers.
The DOE report showed commercial crude inventories rose by 4.7 mb, with 1.1 mb withdrawn from the SPR. Exports of crude totalled 2.9 mb compared to 1.7 mb a year ago while imports were 6.9 mb compared to 8.2 mb a year ago. Capacity utilization fell to 89.9 percent, still off from year ago levels of 91.8 percent. Cushing stocks continue to build, rising by 1.3 mb to 49.1 mb compared to year ago levels of 36.1 mb. In products, gasoline stocks rose by 3.7 mb while distillate stocks rose .8 mb. Total product supplied was 19.7 mb, well below year ago levels of 20.7 mb. Gasoline and distillate product supplied year to date are off .4 percent and .1 percent respectively.
Despite the breakdown we still see the market being contained in the 60.00-65.50 area until the effectiveness of the sanctions can be assessed, the output levels from OPEC are determined for the 2nd half of the year, and the OPEC meeting on June 25-26th takes place. Economic weakness remains in the background as a potential negative but looks to be priced in given today’s breakdown.
Values fell sharply in response to ideas that demand will ease next week as cooling needs will not be as substantial as previously thought. Instead the market remains concerned that a recovery in production levels will lead to excess supply and a steady rebuilding of inventories. With stocks expected to increase by 104 bcf in tomorrow’s report compared to 106 in the prior week and 88 bcf for the five year average, concerns over low stock levels should continue to be pushed into the background. Today’s break has taken us below our 2.60 support area, and with the weak close we would expect the lows from late March in the 2.53 area basis July to be tested before support develops on an oversold condition.
Charts Courtesy of DTN Prophet X
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options ADMIS position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to. The authors of this piece currently maintain positions in the commodities mentioned within this report. Charts Courtesy of DTN Prophet X, EIA.
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