header_img

Energy Brief December 3

by Archer Financial Services | Dec 03, 2018
by Steve Platt and Mike McElroy

Price Overview

The petroleum complex rallied sharply in response to news that the US and China had agreed to freeze additional trade tariffs for at least 90 days while they hold talks to resolve existing disputes.  The agreement helped provide optimism that the global economy would not contract and that oil demand would be maintained assuming a longer lasting agreement is reached.  Ideas that imports of US crude by China would increase in the near term also provided a bullish backdrop for values following the sharp recent declines.  Some support was also apparent from the upcoming OPEC meeting in Vienna.  Hints that OPEC and Russia would announce production cuts totaling between 1.0-1.4 mb/d to rebalance the market helped underpin the rally.

Despite the optimism the market remained cautious given ongoing claims by Iran that Saudi Arabia and Russia should bear the bulk of production cuts given that they had expanded production the most over the past few months.  Nevertheless reports did suggest that Russia is becoming increasingly convinced that they need to reduce oil output in tandem with OPEC and were discussing the possible cuts with Saudi Arabia over the timing and volume of the cuts.  With crude down as much as $15, or 27% during the month of November, the market is searching for signs that Russia and Saudi Arabia are prepared to cut output levels by a combined 1 mb, which would help offset the potential surplus in the first half of 2019 if the current output levels were maintained.
crude oil chart

Throughout this week the market will be focused on the OPEC gathering and its results.  The bulk of producers appear content to remain in the background given their inability to ramp up production, and they appear supportive of output levels reverting back to those in force earlier this year.  Some attention at the meeting will be focused on Iraq and Nigeria, who appear to have excess capacity and have been expanding their production. The fight over market share might be pronounced and will be watched closely to gage OPEC’s ability to prop up values.  Particularly important will be the depth of cooperation between Saudi Arabia and Russia and whether that is enhanced at the meeting.  The withdrawal of Qatar from OPEC, although a small producer, does suggest some conflicts exist within the organization and how deep these divisions are will be watched closely.

Natural Gas

The market continues to look past the cold 6-10 day forecast and is instead focusing on the moderating temperatures expected for mid-December, with some suggesting the month will be near normal with respect to Heating Degree Days.  In addition fears persist over the displacement of natural gas with coal, and how it might affect demand.  Early estimates for this  week’s EIA report point to a draw of 73 bcf compared to 3 last year and 58 on the five year average.  Today’s breakdown could point to additional losses down toward the 3.75 level basis February where some resting support might be apparent.  Buying might develop on fears of freezeoffs inhibituing production in Texas, and the low stocks, which are near 20 percent below the five year average.  
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.

Offers