The market traded under pressure today as continued record US production and tariff concerns offset somewhat positive DOE numbers. July crude held the 66.00 level early in the morning before giving out late in the session as selling momentum pushed crude prices to new lows, settling off by 1.23 at 65.81. Products also saw weakness with gasoline down by nearly 2 cents and heating oil losing close to 3 cents.
The DOE Report, released yesterday due to the Memorial Day holiday, showed crude stocks drawing down by 3.6 mb. This was a larger decrease than expected but was offset by builds in the products, with distillate and gasoline stocks increasing by .63 and .53 mb respectively when draws had been expected. US production was indicated at a record 10.769 mb/d. The pace of US output has started to create logistical concerns regarding available capacity for the movement of crude out of the interior of the country, which has added to the recent weakness.
Reports indicate that compliance levels with the OPEC agreement remain at very high levels, with much of that being assisted by ongoing production issues in Venezuela as well as Nigeria. This supportive influence continues to be offset against recent suggestions by Saudi Arabia and Russia that they may raise production levels to offset these losses. If this occurs then concern will likely grow regarding the actions of the rest of the cartel and whether they will remain compliant with the agreement or if they attempt to take advantage of the higher prices to push ahead sales and increase production above stated targets.
The move lower seems to have picked up momentum late in the session and now points to a test of the 65.00 area early next week as strong US production and dollar strength repel any rally attempts.
Prices saw some minor retrenchment today following yesterday’s sharp move higher that was spurred by the weekly storage report. The 96 bcf build was below expectations at 102 and the 5 year average at 97. This development seemed to spook traders who were already nervous about next weeks storage number following the sweltering Memorial Day weekend. Early estimates are pointing to an 83 bcf build compared to the average for this time of year at 104. Stock levels remain well below normal and the early season heat is creating more concerns about the summer weather trend. We expect a test of the 3.00 area basis July near term as forecasts into the middle of June continue to indicate above normal temperatures. Long positions established near 2.74 should raise the stop to the 2.825 level basis July.
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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