An easing in supply pressures at Cushing on reports of crude inventories increasing by as much as 800 tb last week helped put further pressure on values. In addition doubts over the impact of Iranian sanctions on global supplies following their imposition in early November shaded sentiment to the downside. Reports the US was already considering exemptions to the sanctions in order to ease initial tightness and the impact on allies as well as prices affected sentiment. There continues to be concern over the Chinese economy and trade tariffs, and the potential for it to lead to reductions and restrictions on Chinese imports of US crude. In the background remains the possibility that they will find ways to get around the US sanctions and increase imports of Iranian crude once the sanctions are implemented. The uncertain outlook comes amid a reduction of speculative long positions, particularly in Brent, where fund managers reduced their net longs in NYMEX and ICE by 13 mb to the lowest level in over a year.
For now it appears that the bulk of bullish news is priced in. Underlying support to values will remain due to ongoing concerns that the sanctions on oil exports from Iran will tighten supply availability, especially if demand is sustained. Some Gulf oil platforms were also shut down ahead of Hurricane Michael which is expected to affect the Florida panhandle but not refining facilities. From a bearish perspective the market will likely be monitoring Russian and Saudi output. In addition the potential that demand will be curtailed due to the higher prices, particularly in local currency at a time when non-OPEC output will be expanding, has also created questions over upside potential.
The possibility that stocks will build in this week’s DOE report should keep the market on the defensive. The ability to take out the 73.80 area basis December today further weakens the chart setup, with resistance up toward 74.30 and potential for values to decline toward the 71.00-72.00 area.
Overall we see the market overreacting to the possible tightness in global energy stocks as we approach the end of the year, and suspect a more reasonable range would be in the mid to high 60 area for WTI, which would put Brent in the 75-80 range given current differentials. We are long the Dec 72.00 crude put near 1.05 risking a break of the .65 area with potential of 3.00 or better.
After a few sessions of retrenchment the market has returned to its stairstep push higher with the November reaching up to 3.294 intraday, a new high for the move. Current warm temperatures coupled with colder expectations in the extended forecast have increased demand potential in the midst of what is typically the lower demand shoulder months. Some background concern is also brewing in the Gulf as Hurricane Michael has strengthened and appears to be headed for the Florida panhandle. An 86 bcf build is expected for Thursday’s report compared to a 5 year average of 90. With the upside spike today and settlement above last weeks highs, it appears the market will maintain it’s positive bias near term with a potential to test the 3.40 area.
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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