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Energy Brief October 31

by Archer Financial Services | Oct 31, 2018
by Steve Platt and Mike McElroy

Price Overview

The petroleum complex traded mixed with early selling emanating from yesterday’s API report while buying later developed in response to the DOE numbers. The API report showed US crude inventories built by 5.7 mb for the week ended October 26th. Offsetting the larger than expected build were the declines in gasoline inventories of 3.5 mb and in distillates of 3.1 mb.  Support developed following the DOE inventory report at mid-morning.  Commercial inventory levels for crude rose by 3.2 mb, with 1.5 mb being withdrawn from the Strategic Petroleum Reserve.  Cushing stocks rose by 1.9 mb reflecting the opening of additional pipeline capacity that is beginning to relieve the tightness evident during the summer along with relieving the bottlenecks in the Permian basin that had weakened cash differentials.  Capacity utilization remained high at 89.4 percent compared to 88.1 in the prior year and 85.12 percent in the same period of 2016.  Product inventories fell by 3.2 mb in gasoline and 4.2 in distillate.
crude oil chart

The report continues to suggest that tightness in middle distillate fuels and diesel is likely to persist.  This has been apparent in the strength to the ULSD crack which has continued to strengthen along with the spread against gasoline.  The increasing production of lighter crude from shale formations in the US, which yields higher levels of lighter fuels such as gasoline and propane vs the middle distillates such as diesel, is likely to persist as the switchover of ships to lower from high sulphur fuel oil that is required in 2020 maintains the tight situation and helps support heating oil on a relative basis to both crude and gasoline.

ULSD Crude
Gasoline

In crude, the mixed tone is likely to persist until clearer indications of the effectiveness of Iranian sanctions in stopping exports emerge.  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 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 suggest a supply surplus is beginning to develop.  

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 traders evaluates how successful they are at inhibiting Iranian exports.  


Natural Gas

The market attracted good support on cooler forecasts for the Midwest in the 8-14 day and on expectations that the EIA will see an injection of 41 bcf compared to last years  build of 65 and the five year average of 61.  The low inventory levels as we begin winter continue to underpin sentiment and helped temper the sharp losses earlier in the week, where values fell to as low as 3.123 basis  February.  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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