The petroleum complex failed to follow through on yesterday’s strong gains as selling interest developed in response to an unexpected build in yesterday afternoon’s API numbers. The report showed stocks built by 3.7 mb compared to expectations for a draw of 2.7, along with a further surge in gasoline inventories, and helped pressure values in advance of the DOE report. Today’s release showed crude inventories built by a more modest 1.6 mb in crude, which uncovered some modest buying but could not be sustained as the market responded to negative economic news overseas in both China and Germany along with weakness in US equity markets. The weak economic readings continue to encourage concern that global demand will be impacted and further cuts in OPEC production will be necessary to balance the market in 2020.
The DOE report showed crude inventories rose by 1.6 mb which was influenced by high net imports that totaled 5.0 mb compared to the average so far in 2019 of 4.2 mb. Capacity utilization fell by 1.6 to 94.8 percent, reflecting weak margins and high inventories for gasoline and helped reduce gasoline inventories by 1.4 mb. Distillate stocks declined by 1.9 mb. Product supplied of gasoline was healthy at 9.9 mb compared to 4 week averages of 9.7 mb as lower prices and better weather conditions encouraged use while distillate supplied remained steady at 3.9. For the year, product supplied of gasoline and distillate continues to trend modestly below year ago levels.
The market is likely to remain nervous over recent comments by the Saudis that they are exploring further action to shore up values. Given the erosion in OSP, threats to market share and the erosion in their production levels remain a concern. The most recent Monthly Report by OPEC reflects this, with demand forecasted to grow by 1.14 mb in 2020 while non-OPEC supply led by the US, Norway and Brazil is expected to grow by 2.4 mb. With pipeline expansion allowing an additional 2.4 mb/d of crude to move to US export terminals over the next year and half, the demand for OPEC crude could fall by another 1.3 mb/d. This might be on the low end if the global economy does not grow as quickly as currently forecasted. With German and Chinese economic numbers suggesting weaker than expected economic growth, concern over the global economy will be a strong headwind to the market. The key question looks to be how committed Saudi Arabia, along with other members of OPEC+, are to cutting production further if needed to support values. With US production levels expected to expand further and reports suggesting US barrels are displacing some origins such as Nigeria, Iran and Saudi Arabia, it appears that as pipeline capacity expands in the Permian Basin even greater pressure will emerge to undercut any rally attempts. In addition, Russia does not appear to be providing unconditional support to the agreement but instead is suggesting that they had already incorporated weak demand into current policy.
The recognition that current OPEC+ policy might not be enough and that demand and production trends are suggesting that they are fighting an uphill battle should limit the upside unless further cuts are pursued and market share is relinquished. From our perspective, this is an untenable situation that will continue to weigh on values and lead to a test of the 47.00-48.00 level basis prompt crude.
The grinding rally seen over the past week and a half finally ran out of steam early this morning. An improving demand outlook supported prices, with short covering also a factor as the 2.20 level in September was tested early in the session. When a penetration of that area could not be maintained the momentum turned and prices quickly retreated to the 2.13 area and continued to work lower the remainder of the session. Prices again seemed to be effected by macro concerns as US equities were taking a beating at the same time. Continued improvement in the storage situation is expected tomorrow with a 55 bcf injection compared to the 5 year average of 49. With prices closing on the lows and a bear flag on the chart, the market is signal a return to the early August lows and a likely test of the 2.00 level.
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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