Written Commentary
by Stephen Platt and Mike McElroy
Price Overview
The petroleum complex recovered from sharp losses seen since Wednesday as the market focused on supply disruptions in Libya and a potential strike action in Norway as tightening supply availability. Libya declared a force majeure on Thursday at the Es Sider and Ras Lanuf ports as well as at the El Feel oilfield. Force majeure was still in effect at other ports of Brega and Zuetina. Daily exports have seen a sharp decline to around 380 tb/d, a decrease of over 800 tb/d from normal production levels. In Norway the prospect that a strike action beginning July 5 will affect as as much as 4 percent of production added to nervousness over prospective supply uncertainty.
The supply uncertainty comes on the heels of the OPEC meeting which concluded Thursday with OPEC+ agreeing to stick to its output strategy through August which targets an increase in production of 648 tb/d. The producer group avoided discussion of September output levels ahead of Biden’s three stop trip to the Mid-East in mid-July which includes a trip to Saudi Arabia.
Supply concerns come on the heels of a report by Reuters indicating OPEC in June failed to deliver on oil output increases as proscribed under the current agreement. In June, the agreement called for a production increase of 432 tb/d of which about 275 tb/d is shared by OPEC producers that are covered by the agreement. The survey found supply rose only 20 tb/d with the biggest declines in Libya and Nigeria. This has put compliance levels with the planned cuts at 253 percent against 178 percent in May. Saudi Arabia, the UAE and Kuwait added a combined 130 tb/d with Saudi Arabia as much as 100 tb/d below quota.
Although recessionary concerns remain in the background, we remain unconvinced that it will be enough to dramatically increase inventories without more significant supply increases from Mid East producers. How quickly OPEC and other producers can expand capacity continues to be a major question mark and currently we still look to be falling short globally of supply needs, A key outlier might be the Iranian Nuclear talks where little news on the resumption of talks has been forthcoming.
Natural Gas
The bottom fell out of the market after yesterday’s storage report showing an 82 bcf injection, well above estimates at 74. The higher than expected build emphasized the fact that the Freeport outage will be forcing a large amount of gas into US storage facilities over the next few months. The 6 dollar level gave fleeting support, but could not hold up to the pressure that was exaggerated by fund selling and a large amount of stop-loss orders. The market lost over a dollar intraday and tested all the way down to the 5.35 area, then found support today on a recovery bounce from the oversold levels as the August gained back 28 cents to settle at 5.73. Well above normal temperatures that have been maintained over the past month are the only underlying support that the market can find at the moment. Production has continued to move in fits and starts, with historic norms suggesting that it will steadily improve into the end of the year, while exports have under-performed as scattered maintenance and liquification issues related to excessive heat hamper the remaining facilities. The break has cleared out a large swath of prices with the next notable resistance at the old support level of 6 dollars. The break has brought into question where support may surface, with 5 dollars the next notable level.
Have a Happy and Safe 4th of July Holiday
Mike and Steve
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.
