Written Commentary
by market analysts Stephen Platt and Mike McElroy
Price Overview
Crude oil values settled sharply higher, gaining 4.55 basis December to settle at 86.35. The recovery was traced to the US clamping down on its sanctions program against Russian crude exports and a tightening supply/demand balance for the fourth quarter. Background support was still apparent from the weekend attack by Hamas militants against Israel and fears it might lead to a wider conflict in the Middle East and potentially additional sanctions on Iran.
The IEA Monthly report confirmed fears over inventory levels, with global observed stocks falling 63.9 mb in August, led by a massive 102.3 mb draw in crude stocks. The IEA suggested that preliminary data for September could indicate that while oil inventories on water rebounded, stocks on land fell. For the OECD, stocks in August fell counter-seasonally by 6.5 mb to 2,816 mb, a substantial 105.3 below the five-year average. They did note evidence of some demand destruction with the preliminary data for the US showing gasoline consumption fell to two-decade lows. Some of the decline was likely weather related. Offsetting the US consumption declines were buoyant demand growth in China, India and Brazil. In 2023, global growth in demand was indicated at 101.9 mb, an increase of 2.3 mb/d, but is expected to slow to 900 tb/d in 2024. World oil output is expected to increase by 1.5 mb/d in 2023 and 1.7 in 2024 to 101.9. Growth in non-OPEC and Iranian output will help offset the anticipated declines in OPEC+ output.
Yesterday’s DOE report showed a larger than expected build in commercial crude oil inventories of 10.2 mb, with the bulk occurring in PADD3 or the Gulf Coast. The market failed to attract strong selling interest given the heightened geopolitical risks in the Middle East, low stocks at Cushing and tighter sanctions against shippers of Russian crude oil who violate the 60.00 price cap. In gasoline and distillate, stocks fell 1.3 and 1.8 mb respectively as refinery utilization fell to 85.9 percent against 87.3 last week. Total stocks of crude and products rose 6.3 mb. Cushing stocks remain tight despite the increase, falling .4 in the latest week to 21.8 mb.
Tight inventory levels at Cushing and globally should provide support to values into the November crude expiration on the 20th, with potential for the December contract to test the 88.00 area. Resistance should emerge there as the market assesses the supply/demand outlook amid high interest rates and a strong dollar impacting emerging markets and Chinese economic prospects. Although Chinese manufacturing activity appears to have stabilized in September, additional stimulus might be necessary to meet growth targets.
Natural Gas
The week ended with back-and-fill action in the natural gas, as the November lost 10.8 cents today to settle at 3.236. The pullback occurred despite heightened global concerns regarding the war in Israel that precipitated strong rallies in other commodities. Moderating weather forecasts and strong production added downside pressure, which coupled with overbought technical levels brought out end-of-week profit taking. Yesterday’s storage report showed an 84 bcf injection that was well below estimates near 94. The inability to hold a rally after the release signaled the near term reversal. For the rally to continue, the current flagging pattern will need to hold in the area of today’s lows which coincide with the 9-day moving average near 3.23. A return higher will not find much resistance until the 3.50 area. A failure to hold today’s lows would target support at 3.08 and then at the 20-day moving average near 3.05.
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.
