Energy Brief for Sept 18.23
by market analysts Stephen Platt and Mike McElroy
Crude oil failed to follow through on early strength linked to concerns over supply tightness into winter as refinery throughput increases to satisfy demand. Instead, prices retreated from as much as 1.34 higher basis November to a gain of 56 cents, settling at 90.58 on concerns that higher prices will disrupt economic growth, discourage demand, and incentivize production. Additional selling was linked to the large inventory overhang in China where stock levels have built over the course of the past year. Reuters reported that in August China added 35 mb to inventories with as much 197 mb added so far this year at discounted prices from Iran and Russia. In the background was the release of US hostages by Iran, which has the potential to revive talks on their nuclear program and the lifting of US sanctions.
Another source of caution on the upside has been the shift from an oversold position in June to one that is overbought. The Commitment of Traders report has reflected the growing bullishness in crude while upside in diesel and other middle distillates appears to have dissipated with funds net sellers in the past four weeks. In crude, the short squeeze that had been evident into June appears to be over with the speculative short position slumping to just 21 mb on September 12th, the lowest level since June of 2022.
From a technical perspective the market looks strong, but fundamentally it appears dubious. Saudi Arabia and Russia’s voluntarily production cuts have been a large factor behind the bullish tone, but others outside OPEC are expanding production. In the US, output has responded to the firmer price levels and is now approaching record highs despite lower rig counts. The increase has been tied to better efficiencies from existing wells. Forecast increases in consumption will be hard to reach if prices remain high and curtail economic activity. In addition, at some point Saudi Arabia will come under mounting budget pressure and the loss of market share and will seek to increase output.
The market found good support to kick off the week, with the October contract adding 8.4 cents while the November gained 6.9. Solid LNG flows over the weekend as Freeport recovered back near 2 bcf/d helped underpin the market with no other fundamental positives in sight. Demand into the shoulder season is losing momentum, and production continues to chug along in the 102 bcf/d range despite expectations for slowing to emerge after months of rig losses. Today’s strenght has pushed prices into the center of last weeks range, but the ability to rally in the face of negative news flow along with a reversal on the chart signals follow through potential. The first target on the upside is in the 2.80-2.82 range, with the double top near 2.86 the next level of resistance after that. Support at the 9-day moving average now near 2.64 is growing stronger, as it was tested again this morning. A settlement below there would be needed to build momentum for a push down to 2.50.
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.