The petroleum complex continued to trade higher on concerns over Venezuelan production following news that Conoco Philips has moved to take over PDVSA Caribbean assets to enforce a $2 billion arbitration award. Fears the action would lead to a cash crunch and likewise a further contraction in Venezuelan production levels appeared to touch off the buying. In the background remains the upcoming decision on May 12th regarding the nuclear agreement with Iran and the question of whether the US will unilaterally back out of the agreement and re-impose sanctions. Another factor that might have contributed to the strength were reports the Russian Energy Minister had pledged Russia’s 100 percent compliance in May with the OPEC led production pact.
With the Iranian decision and its possible consequences still ahead it is not surprising to see the complex respond in a bullish fashion to any other influence that could be construed as constructive, and ignore any news that might have a negative impact on values. Whether the 71.00 basis June WTI holds as a resistance area remains to be seen.
For the most part the market has ignored comments by the Iranian President suggesting that Iran might remain in the 2015 nuclear deal even if the United States dropped out. This would preserve the pact with key European participants such as Germany, France and the UK, and to some extent might isolate the US diplomatically. How the US proceeds, and the possible support of Israel and Saudi Arabia to any US action, could be a huge determinant of whether the action ramps up geopolitical tension in the area. In addition, the impact on Iranian export levels
appears questionable given the possibility the oil exports from Iran will still be made to those who remain in the pact and others outside the original agreement such as China. Any shortfall in production could be made up from other OPEC members such as Saudi Arabia.
As prices move higher the market might need to face up to potentially bearish considerations. These include the prospect that OPEC and Russia will reconsider their level of production cuts, that investment will pick up in oil producing areas, that US production will continue to expand, and increasing investment interest in higher cost oil assets. In essence keeping it all together from a supply demand perspective gets harder as prices increase.
Early pressure on values reflecting record high production levels could not be sustained. Instead forecasts for warmer temperatures on the East Coast in the 8-14 day outlook appeared to attract buying interest. Despite the recovery, participants remain cautious given the expectations for the EIA report to show a larger than normal injection this week of 82 bcf, compared to 49 last year and a five year average of 75. With stocks well below average, any unexpected increase in demand could raise concern over prevailing stock levels and the outlook for winter. Stocks will be watched closely as we head into summer and the potential emerges for demand spikes. We remain Long July near 2.74 risking the 2.68 area and an objective of 3.05.
Charts Courtesy of DTN Prophet X
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 views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. 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 ADMIS position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to. The authors of this piece currently maintain positions in the commodities mentioned within this report. Charts Courtesy of DTN Prophet X, EIA.
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