The petroleum complex came under pressure on reports the US has allowed eight countries to temporarily keep importing Iranian oil without defying the sanctions scheduled to go into effect next week on November 5. Ideas the Trump Administration is softening their Iranian policy in order to soften the impact of higher oil prices during the US mid-term elections appeared to undercut values and encourage stale long liquidation and fund selling. The reports merely highlighted efforts by the Administration recently to get Saudi Arabia and Kuwait to resume production in the neutral zone along with a reopening of the pipeline through Iraq into Turkey from Kurdish held areas. The appearance that supply availability is improving at a time when demand might be softening has exacerbated bearish sentiment and has led to the recent breakdown through the 65.00 level and as low as 62.63 basis December today.
Although we have so far not seen any evidence that OPEC is prepared to act to shore up values, we suspect that both Russia and Saudi Arabia are prepared to act if the 60.00 level in WTI is breached. Reports the OPEC monitoring committee has been looking at options to rebalance the market if the market is pushed either into surplus or deficit likely suggests that OPEC is looking to be proactive to not only high prices but low prices as well, If this proves to be the case, the market should attract some better support into the sanctions despite the possibility for some distressed selling of inventory built up ahead of the sanctions.
From these levels we would favor buying on a further setback, the January 65.00 WTI Crude Call at 1.05 with an objective of 3.00-4.00.
Early pressure on values based on ideas that stocks would build in November contra-seasonally lacked followthrough as fresh buying emerged. Buying appeared to have been encouraged by the prospect exports of LNG will pick up as additional transport is provided from the Cherniere terminal helping expand consumption by as much as 1.4 bcf/d. In the background were also forecasts of cooler temps and increasing demand. Early indications for the EIA report next week are for a build of 54 bcf compared to 22 a year ago and 48 on the five year average. 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 basis February.
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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