The petroleum complex traded higher with values rising over 5 cents in gasoline and close to 1 1/2 dollars at one point in crude, while ULSD generally lagged within the complex. The strength appeared to have been linked to sanctions on PDVSA, the National Oil Company of Venezuela, which exports as much as 500 tb/d of crude to the US. The sanctions froze assets and require US firms to pay for oil using accounts controlled by the country’s opposition party. Although PDVSA is attempting to replace current contracts with swaps for other petroleum products and the use of intermediaries for oil transactions, there are doubts these work arounds will succeed. In addition the potential that refining operations at Citgo will be disrupted despite previous exemptions appeared to underpin gasoline, which also benefitted from refinery operations being curtailed due to the extreme cold in the Midwest along with the constructive DOE reeport.
The DOE report showed crude stockpiles rising by .9 mb while Cushing stocks fell by 145 tb. The increase in crude was well short of expectations at 3.2 mb. In gasoline, stocks fell by 2.2 mb compared to expectations for an increase of 1.9 mb. Distillate stockpiles fell by 1.1 mb compared to expectations for a 1.4 mb decline. Refinery utilization fell to 90.1 in the latest reporting week. The decline in utilization likely helped exascebate renewed interest on the long side of gasoline both on a flat price and spread basis on ideas refinery maintenance is being encouraged by the weak gasoline margins. Strength in gasoline supplied also was encouraging at 9.6 mb compared to 9.0 mb in the latest four week period.
Despite the strength today, we remain doubtful the concerns over Venezuela will persist. The chance for regime change is real and even if it is slow to come about the oil currently supplied to the US could be rerouted through other origins such as Russia and China, displacing other crude streams. US inventory levels currently appear adequate and with other origins anxious to fill the void, supply availabilty looks adequate despite the sanctions. Subsequently we look for resistance to build near current levels as participants monitor the success of the OPEC agreement along with the progress of the trade talks with China.
Natural gas prices continued to slip lower on a moderating temperature forecast despite the extreme cold hitting the country today and tomorrow. The failure to respond to increased usage this week reflects ideas that as temperatures moderate, stocks will trend to more normal levels as record high production begins to compensate for the higher recent demand as we move through winter and into the lower demand shoulder months. Estimates for this weeks EIA report are for inventories to decline by 183 bcf compared to 126 bcf last year and 150 bcf on the five year average. Prices still look poised to test the the 2.65-2.70 area basis March where better support should emerge.
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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