The petroleum complex traded on the defensive as renewed concerns over the strength to the world economy encouraged selling against recent resistance in the 55.75 area basis the March WTI crude. The breakdown carried values back toward recent lows near the 53.30 area where support emerged. Concerns over the Venezuelan sanctions and the OPEC cuts in December are being offset by ongoing worries that the US-China trade dispute will lead to slower demand growth. Additional concern over economic prospects were linked to weak US manufacturing data. In the background were reports the Russian Energy Minister had indicated that they were in full compliance with their pleadge to gradually cut oil production . The Energy Minister indicated that Russian Oil production had decreased by 47 tb/d in January from October, which is the baseline for the agreement by OPEC+. We suspect given the production cuts by other Persian Gulf producers, there might be some dissatisfaction with the speed at which Russian cuts are taking place.
In the background remained concerns over refinery operations, particularly at Citgo. Disruptions linked to US sanctions are preventing payments for crude to Venezuela’s state-owned oil company PDVSA. The disruption has led to strength in both the gasoline crack and 2 oil crack. Reports of a sizable build in Cushing stocks helped attract good buying in the cracks today.
We still suspect that for the most part the concerns over Venezuela have been discounted. 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 ample, and with other origins anxious to fill the void, supply availabilty looks adequate despite the sanctions. Subsequently we look for resistance to build as participants monitor the success of the OPEC agreement along with the progress of the trade talks with China and its economic prospects. In addition further expansion in US production remains likely as good oil company profits in the most recent quarter provide the incentive for continued capital investement.
Downward revisions to demand due to furthern adjustments upward in forecasted temperatures for February kept the market on the defensive. With freeze offs unlikely, production which hit a four month low of 85 bcf/d, should begin to recover. Neverthless the estimates that last weeks storage withdrawals totaled 235 bcf compared to 116 last year and a five year average draw of 150 should limit selling into our expected support near current levels between 2.65-2.70 basis March. At these levels we should see some increased demand from coal switching back to natural gas and fresh demand for LNG exports.
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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