The petroleum complex recovered from yesterday’s sharp losses, which saw values trade down to 53.59 in September, and recovered up to a high of 56.05 today before attracting profit taking. While many attribute yesterday’s sharp decline to ideas that Trump’s additional tariffs on China beginning September 1st will exacerbate a global slowdown, other factors appear at work to undermine crude oil values in spite of the steady decline in US inventories, OPEC production cuts and heightened geopolitical tension.
Although demand concerns remain a limiting influence on the upside, the expansion in output outside of OPEC remains of utmost concern. With growth likely to be maintained by non-OPEC producers at a time when OPEC is producing well below capacity, the potential that shut-in production will eventually be available to the market at a time when growth in demand will likely continue to be sluggish has the potential to be a source of long-term weakness.
The competition from other producers is being felt, with reports indicating that the Saudis are considering a cut in oil prices to their Asian customers in September for the second straight month. The Official Selling price for Arab Light could drop by at least 50 cents, falling below a premium of 2.00 per barrel for the first time in four months. Asian incremental demand for September loading of Middle East crude appears to have weakened, with several North Asian refineries closing for maintenance in the autumn. In addition, the increasing sales of Russian and US crude and displacement of Saudi barrels in China remains a concern and will likely be a longer-term global phenomenon creating the incentive for competition at a time when the Saudis and OPEC are attempting to preserve market discipline.
Subsequently the recovery in values from the steep fall yesterday might only be temporary as resistance near 57.00 area builds in the absence of constructive news on the supply front.
The rally in natural gas was short lived as prices fell sharply today, with an intraday low at 2.077 on the September contract. The market had found good follow through support yesterday as an explosion at a Texas supply line had spurred prices to new highs, but it was short lived as the storage report surprised the market. The 65 bcf build surpassed estimates in the 57 area and prices began their slide soon after. The Twitter tariffs announced by the President put further pressure on the market as the trade war looks to extend even further. For the most part fundamental news was neutral, with weather demand uninspiring into the middle of August following record July usage. LNG exports appear poised for increases as new units prepare to come into service, while production continues to recover and hovers just below record levels. With the market making new lows today, he next logical support area is at 2.00. Another above average build is in the cards for next week, with analysts estimating a 55 bcf injection compared to the average for this time of year at 43.
Charts Courtesy of DTN Prophet X
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