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Energy Brief Sep 22

Price Overview

The petroleum complex traded in a firm fashion as outside markets continued to recover following reports the Chinese property company Evergrande had agreed to settle interest payments on a domestic bond payment due Wednesday while the Chinese central bank also moved to inject reserves into the banking system. In addition, a further draw down in US crude inventories and an unchanged Fed policy also supported values.

Although the Evergrande news provided stability today, it remained unclear whether they will avoid defaulting on a number of bond interest payments due this week and particularly interest payments on foreign bonds. Nevertheless, constructive fundamentals tied to OPEC and macro fundamentals contributed to optimism that the firmer price structure will be maintained. These included reports:

– That some analysts are suggesting global oil demand will rise back above 100 mb/d as soon as the second quarter of 2022, suggesting that the end of fossil fuel use is far from reality.

– Ongoing challenges to OPEC+ meeting its targeted production levels in response to under investment and delays to maintenance due to the pandemic. Reports that OPEC compliance rose to 116 percent in August compared to 109 percent in July despite a boost in production appear to be underlying the concerns; keeping pricing control in the hands of Saudi Arabia and Russia, the two largest producers in OPEC+. Additional information is likely to be forthcoming following the meeting by OPEC+ JTC on September 24 and the Ministerial meeting on October 4. The meeting is largely expected to reaffirm the current production accord leading to a further increase in production of 400 tb/d in November.

The DOE report continues to show a declining trend in US inventories with commercial crude inventories falling 3.5 mb despite a release of 1.2 mb from the SPR. Total commercial petroleum inventories fell 2.6 mb with gasoline rising an unexpected 3.5 mb while distillate fell 2.6 mb. Domestic crude production continues to recover from storm related losses rising to 10.6 mb from 10.1 mb last week. Crude imports surged to 6.5 mb. Disappearance levels also showed a strong recovery back to 21.1 mb with distillate showing the strongest gains. Gasoline appeared to be the major disappointment with the November Gas Crack remaining weak at 15.25 per barrel off .75 today as questions over the pace of demand persist.  

The appearance OPEC is looking to facilitate a stable market around current levels as the demand picture becomes clearer and inventories remain at the low end of historical levels will likely provide support along with demand recovery. The big challenge will be the economic prospects for China but supply uncertainty will likely provide good underlying support. Near term 73.50 appears to be upside resistance. 

Natural Gas

Nat Gas saw a modest recovery following yesterday’s sharp sell off that took values down to a low of 4.766 basis Nov Forecasts of weaker demand due to cooler conditions next week along with the prospect that LNG exports will not recover dramatically higher despite the record high premiums of  international prices to those in the US due to capacity restraints to US LNG facilities has tempered the bullish mood. Caution was also apparent in advance of the EIA inventory report tomorrow which is expected to show an injection of 68 bcf following last week’s larger than expected build. With Nat Gas production recovering in the Gulf,the prospect for higher production and weaker demand appears to be moderating concern over prevailing stock levels and the prospective adequacy of stocks as we move toward winter. A negative inventory report tomorrow along with concerns that Nat Gas demand will need to be rolled back particularly overseas due to limited supplies and low stocks might provide the basis for a further retrenchment in values back toward the 4.50 area basis Nov. Resistance is likely on recoveries toward the 5.05 level. 

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.

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