Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil values settled lower with November off 1.87 at 84.16. The sharp decline reflected ideas that the disruptions following the Hamas invasion of Israel would be limited given that neither area is a producer of oil. More important was the Saudi pledge to help stabilize the market and statements that it was working with regional and international partners in this effort. The market has so far avoided Iranian involvement with the appearance that Saudi Arabia and Israel are still intent on facilitating a rapprochement with the US acting as a mediator. Whether this leads to an agreement remains to be seen.
The market is also responding to recent sharp declines in refinery utilization. While throughput typically declines in October as maintenance takes place, the sharper than expected drop might reflect weaker demand for gasoline as the economy and spending slows. The weakness has been pronounced along with the sharp decline in the nearby gasoline crack to under 10.00, a level not seen since the early stages of Covid in 2020. Expansion of refinery capacity has also been seen, keeping the market well supplied not only in the US but also Europe. Weakness in the backwardation foreshadowed the recent decline, and if strength returns it might signal a firmer tone in the near term as concerns over stock declines reassert themselves. A recovery in the gasoline crack will need to materialize to encourage refinery throughput and provide support on ideas that disappearance might not be as bad as currently thought.
Outside of geopolitical uncertainty the past two days, weakness also reflects the possibility of Kurdish exports through Turkey restarting, the likelihood that output will increase in 2024 as Persian Gulf producers begin to assess the impact of current cuts on market share, and the expansion of availability from Iran, Nigeria and Libya that is expected over time. On the demand side, questions have arisen regarding the sharp decline in gasoline disappearance, which has led to a reassessment of growth. Seasonally the decline is not unusual but the trend upward in interest rates and strength in the dollar have raised questions over demand growth.
With values holding above the 100-day moving average at 81.13, we expect more formidable support to emerge, particularly ahead of the November contract expiration on October 20th given the low level of deliverable stocks at Cushing with potential to retest the 88.00 level basis November.
The DOE report is expected to show crude inventories rising 1.3 mb, distillate down 1.4 and gasoline lower by1.9 mb. Refinery utilization is expected to drop .5 to 86.8 percent.
Natural Gas
The market maintained upside momentum early in the week, with prices closing higher Monday and Tuesday while reaching an intraday peak at 3.471 basis November. Today’s action saw values retrench before recovering late to settle ½ cent lower at 3.377. The technical strength driving the market was aided by macro concerns over the war in Israel, continued risk of strikes by LNG workers in Australia, and the apparently deliberate damage to an undersea pipeline in the Baltic Sea that lead to a strong rally in Dutch TTF prices to start the week. Weakness today was traced to lackluster shoulder season demand coupled with production strength, with output consistently above 103 bcf/d recently. Despite the lower close, the market ended 15 cents above the intraday lows and held the 200-day moving average after a wave of profit taking this morning. The August high at 3.485 remains the target for the bulls, with a settlement through there necessary to maintain the rally. Initial support should surface near 3.30 and below there in the 3.20 area.
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 information and comments contained herein is provided by ADMIS and in no way should be construed to be information provided by ADM. The author of this report did not have a financial interest in any of the contracts discussed in this report at the time the report was prepared. 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 position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright ADM Investor Services, Inc.
