The petroleum complex firmed in a surprising fashion reaching a high of 76.72 basis Dec WTI. The market, after initially weakening to near 74.00 per barrel, rallied sharply on active short covering and new buying on the market’s failure to respond to bearish news linked to the DOE report and reports Russia and Saudi Arabia had struck a private deal in September to raise output. The two countries were looking to keep the understanding secret given prospective criticism from other members over cooperating with the US. The report needs to be considered as a factor given the US desire for oil prices to cool ahead of the November 6 election. If action to quell the rally in oil prices does not evolve on the part of OPEC, the potential exists for the US to tap the Strategic Petroleum Reserve to potentially relieve the near term tightness in energy markets.
The uncertainty appears to be bolstering value and may have accounted for the failure to respond in a bearish fashion to the DOE report except initially, the report showed Crude inventories rising by 8 mb in the latest week. Crude inventories at current levels look comfortable given the lower level of net crude imports into the US suggesting that the need for either the strategic petroleum reserve or level of commercial inventories might be less is less due to the sharp expansion in US production. In addition, it appears that US crude oil shipments to China have reportedly stopped totally according to an executive at a Chinese shipping company. In products stocks of distillate were reported to have declined by 1.8 mb while the gasoline inventories fell .5 mb. Capacity utilization was 90.4 unchanged from the prior week.
Overall we still see the market overreacting to prospective tightness in global energy as we approach the end of the year and suspect a more reasonable range would be in the mid to high 60 are for WTI which would put Brent in the 75-80 range given current differentials. Given this perspective we would favor the purchase of the Dec 72.00 Crude puts near 1.05 or better risking a break of the .65 area with potential of 3.00 or better.
Nat Gas prices continue to perform in a firm fashion with values advancing up to as high as the 3.27 level basis February. Stock levels remain a primary concern and the reaction to tomorrows report might be how strong these concerns are. Trade will have to deal with a fairly high build in tomporrow’s EIA report with expectations pointing to a large build of 97 bcf verses the 5 year average at 84 and last years build of only 44. We still believe this run up has come too quickly, but recognise the runup may well be justified if winter usage is high. For next week the appearance temps will be above normal in the South East could heighten cooling needs helping underpin demand and limiting builds in storage.
Charts Courtesy of DTN Prophet X
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