Energy Brief March 15

by Archer Financial Services | Mar 15, 2019
by Steve Platt and Mike McElroy

Price Overview

The market once again appears to be stalling just above what had been resistance near the 57.00-57.50 level, as values reached a  high of 58.95 before reaching back down toward a low of 57.74 basis April.  Bigger losses occurred on Brent where the spread with WTI has contracted and reached -7.90 basis June. WTI appears to be attracting better demand than Brent as pipeline capacity improves for moving wet barrels from the Permian.
crude oil chart

Although the market looks ready to respond to movement by OPEC to cut production and control the market, values might eventually succumb to an expansion of spare capacity.  Intended cutbacks by OPEC despite Russian cooperation works only when production is controlled.  The rising dominance of the US and its growing market share at the expense of other producers is problematic for the market, particularly given the questionable demand potential.  As the largest world producer not subject to production controls, the US has been able to offset the loss of Venezuelan, Iranian and OPEC production combined.   Ultimately the flattening out of demand growth and individual budget considerations has potential to undercut values and eventually force a global fight for market share.
crude oil chart 1

The IEA Monthly report suggests that OPEC members are sitting on as much as 2.4 mb of spare production capacity.  Any signs that Venezuela is turning the corner with a more stable political environement and likewise more advantageous investment potential could lead to a quick output recovery just as other producers such as the US, Iraq and Libya expand output.  Despite what looks to be a favorable technical environment we will be looking for short option plays in which to take advantage of what we percieve as a market vulerable to a downside move.   


Natural Gas

After managing to fill the gap on the charts from Monday, prices slipped today as the bump from yesterday’s large storage draw ran its course and attention returned to the warming forecasts and looming end to the winter demand season. The 204 bcf draw was a record for this time of year, and puts storage more than 30% below the 5 year average.  As we enter the shoulder season concern will gradually turn to the outlook for summer cooling, as trade will have to decide whether current prices are adequate compared to storage levels.  Early estimates of next week’s storage release indicate a 52 bcf drawdown, in line with the 5 year average of 56.  The 100 day moving average just above 2.79 in April held support today, look for that area to be tested next week as range bound trade between 2.75 and 2.85 is likely through April expiration.

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.