The re-imposition of sanctions by the US on Iran’s oil industry appeared to have been taken in stride as the US granted waivers to some countries to continue importing oil over the next 180 days. The sanctions which reportedly has taken as much as 1 mb/d off the market already have been offset by increased production from other producers especially Saudi Arabia and Russia. In addition efforts have also been made 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 been largely discounted.
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
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. On a flat price basis the potential exists for a recovery rally up toward the 68.30 area basis Dec provided todays lows at 62.52 hold.
The market traded sharply higher off the opening as the 10-14 day forecast turned colder over the weekend. Ideas that demand will pick up as supplies from Canada are constrained and demand from Mexico expands helped gap values higher off the opening with values reaching a high of 3.41 basis February. Buying also 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. Indications for the EIA report this week are for a build of 54 bcf compared to 22 a year ago and 48 on the five year average. The strong move today which saw values advance as much 21.9 cent per mmbtu likely was overdone yet is a strong signal of how volatile the market might be if weather turns abnormally cold.
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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