Written Commentary
Price Overview
The petroleum complex showed a strong rebound following last week’s sharp losses. A weak dollar along with a strong recovery in key industrial commodities such as copper appeared to encourage the strong move to the upside. Also encouraging buying were reports that China had not reported any new locally transmitted COVID infections on Monday, which helped support ideas that the uptick in infections might be coming under control. The strong buying interest helped take values back through what had been support near the 65.00 level basis October.
Although pressure might emerge depending on the trend of infections and whether additional areas of the global economy are closed, the market will continue to watch inventory levels closely. OECD stocks have been declining and are at pre-pandemic levels. The likelihood that consumption will be revised downward suggests that forward coverage is somewhat better than had been anticipated as stocks decline more slowly along with demand. By no means does it look like the supply/demand situation will be in surplus, but the uncertainty is weighing on values and has forced speculative liquidation. The most recent CFTC commitment of trader’s report showed hedge funds sold petroleum for the seventh time in nine weeks with the sale of 40 million barrels in the 6 major futures contracts. The combined position across those contracts has fallen to 692 mb from a recent peak of 945 mb in the middle of June. While the scope of liquidation pressure is likely to ease, some further pressure might emerge at higher levels if demand falls. Key to the outlook will be the dollar, trends in outside markets in the industrial sector, as well as the direction of interest rates and Fed policy.
The DOE report on Wednesday is expected to show crude inventories declining by 2.4 mb, gasoline off 1.7 mb and distillate inventories up .8 mb. Refinery utilization is expected to be unchanged at 92.2 percent.
Natural Gas
Overnight revisions to weather models indicated an increase in overall CDD’s into the middle of the 15 day forecasts and brought out good buying interest. A risk-on tone across commodity markets added spillover strength as the petroleum complex, equities and precious metals were all sharply higher on the day. The October contract ended the session with a gain of over 9 cents to settle at 3.96. Tropical Storm Henri made landfall in New England this weekend, bringing heavy rain and winds. Despite the problems, market fallout was limited as outages did not appear extensive enough to cause any major demand disruptions. At the moment there are no other storms causing concern. With the solid close the market looks poised to probe higher, with 3.98 marking a 50 percent retracement of the August break. Any pullback should encounter initial support near 3.85.
Charts Courtesy of DTN Prophet X, EIA, Reuters
The authors of this piece do currently maintain positions in the commodities mentioned within this report.
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.
