The petroleum complex staged a recovery from recent sharp losses, raising the question as to whether a bottom has been reached against the 50.00 level in prompt crude. The decline in values from as high as 76.00 in early October to just under 50.00 last week has run counter to forecasts suggesting a crude price in the 80-100 range. These were based on the anticipated impact of the Iranian sanctions which took effect earlier this month. From this analyst’s viewpoint, the last 15 dollars of decline was largely unexpected.
Looking back at what might have been missed, the key factor does not appear to be weakening demand but rather the changing face of pricing power within the global oil economy. The quick transition has taken OPEC from an organization that generally had a unified voice in their effort to control the global supply of crude and shifted power into the hands of the three largest producers, Saudi Arabia, Russia and the US. Politics and economics appear to be increasingly intertwined. Although the US is not party to any price setting agreements given its illegality and the lack of concentration and control of domestic production, the current US administration has made it clear to the Saudis that the high oil price was not politically or economically expedient. The US might overlook Saudi leadership responsibility in the Khashoggi killing if efforts are made to maintain downward pressure on oil prices by maintaining production levels. Given this possibility, the capture of Ukrainian ships by the Russian government might just as easily be overlooked by the US administration if the Russians play along by maintaining crude oil production and a stable price level that is acceptable to the US government.
How this plays out remains to be seen as we approach this week’s G-20 meeting in Buenos Aires. Top leaders from Russia, Saudi Arabia and the US will be in attendance. What comes out of these discussions likely will set the framework for an agreement at the OPEC meeting on December 6th that will determine the oil outlook for 2019.
There has undoubtedly been a power shift among oil producers, and given the marked decline it will force some reassessment of current aims with respect to budgets, potential market share, and political goals by the key players. No longer can one assume OPEC will work together to maintain revenue, as other goals and objectives seem to be coming under stronger consideration within the oil complex by its most powerful and influential members.
A moderation in the 8-14 day forecast appears to have encouraged active liquidation pressure early in the session. In addition, some shifting from natural gas to coal has led to selling on fears that demand will be tempered. Nevertheless good support developed against the 4.00 level basis January as ongoing concerns over low storage levels remain in the background. Current estimates for the EIA point to a draw of 67 bcf compared to last years 35 bcf decrease and the five year average drawdown of 49. With stocks over 18 percent below the 5 year average, we believe that the May natural gas is undervalued at current levels and should continue attarcting support toward the 2.60 level.
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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