The petroleum complex came under concerted selling pressure as the market responded to Friday’s increase in US rig counts, along with ongoing concerns the trade dispute betweeen the US and China will adversely affect global economic growth, and in particular China’s growth. In the background remains the sluggish economic situation in Europe which might also prove to be a drag on trade flows and likewise oil demand.
The build in US inventory levels remains a background consideration and a constraining influence on values as gas and crude inventories continue to surge. The need to address the inventory issue remains a source of concern. There is little concrete evidence that Russia is moving quickly to cut back production and the increase in US rig counts of 10 underscores the importance of US production to the price outlook and global availability in the current year.
Although concerns over the availability of Venezuelan crude might surface, we suspect that any further declines in production might be limited and that the onus will be on OPEC to manage production levels. There already appears to be some loss of Chinese market share by Saudi Arabia to Russia, and the large inventory overhang, particularly of gasoline, might be a negative influence on values. In addition global economic concerns remain despite the strong recovery in US equities. This should allow values to retest the 49.00 area basis March. Toward that level, support should emerge as pressure builds on Russia to honor the agreement and adjust production downward.
Prices fell sharply as forecasts for cold weather moderated from extreme levels predicted in the 6-10 day on Friday, to a much more moderate outlook in the 10-14 day forecast today. The stark contrast appeared to catch participants by surprise, with values falling over 5 percent. The swiftness of the decline shows the impact of longer term weather forecasts on values, and that short term changes in the stock outlook can have a significant bearing as well. The breakdown has the potential to continue in the near term ahead of the February gas expiration tomorrow. Early estimates for this weeks EIA report are for inventories to decline by 183 bcf compared to 126 last year and 150 on the five year average. Today’s surprising pullback looks like it could press values down toward the 2.65-2.70 area basis March.
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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