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Energy Brief October 29

by Archer Financial Services | Oct 29, 2018
by Steve Platt and Mike McElroy

Price Overview

The petroleum complex traded under modest pressure following comments by the Russian Energy Minister that Russia intended to keep output high. The Russian Energy minister Novak indicated that there was no reason to freeze or cut its output given that global markets were potentially facing a deficit. In addition, reports that India, China and Turkey were resisting Washington’s efforts to shut down Iranian exports due to prevailing tightness. Nevertheless, the market remained cautious given the approach of US sanctions on Iranian exports on November 4th.

The mixed tone is likely to persist until clearer indications of the effectiveness of Iranian sanctions in stopping Iranian exports are clear. Already some doubts over their effectiveness are apparent amidst reports that Iran is selling crude to private companies via a domestic exchange that is outside of international finance. In addition, Europe also appears to be encouraging direct barter transactions to evade the US sanctions as well.

Values are likely to trade in a choppy fashion given fears of a supply surplus despite the US sanctions on oil exports from Iran.  The appearance that global trade has slowed is forcing a reassessment of the global economic outlook. Repeated assurances by the Saudis of production increases to help soften the impact of sanctions against Iran along with Russian output increases continues to suggest a supply surplus is beginning to develop.  

It looks like prices have reached the lower end of a range that key members of OPEC are willing to defend.  This was apparent from comments attributed to the OPEC ministerial committee suggesting that the Joint Technical Committee will “continue to study the 2019 outlook and present options on 2019 production levels to prevent the reemergence of a market imbalance.”  Already some imbalances are beginning to show up.  Gasoline inventories are becoming burdensome in the Far East and there is little relief in sight given the Chinese move to issue additional fuel export quotas.

For now, the market is in a consolidative phase with the 66.00 level representing a key area of support and resistance likely to emerge near the 70.50-71.50 level basis December.  The upside could well be tested as we move closer to the sanctions and trade evaluates how successful they are at inhibiting Iranian exports.  The EIA expects Iranian crude production to fall by 1 mb/d to 2.8 mb/d.  Offsetting the potential decline has not only been output increases by the Saudis and Russians but a recovery in Nigerian and Libyan production levels.  The increases are helping alleviate concern over potential supply tightness, especially when one considers the potential for a contraction in the global economy.

crude oil chart

Natural Gas

The market traded under modest pressure following sharp losses early on high gas production levels and forecasts for above normal temps along the East Coast in the 8-14 day forecast. The prospect that the EIA will see an injection of 41 bcf compared to last years  build of 65 and 61 bcf for the five year average helped temper the sharp losses early whereby values fell to as low as 3.123 basis  Feb. The low stock levels and approach of winter should underpin values and provide the basis for a recovery rally back toward the 3.30 level.   

natural gas chart
 

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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