The petroleum complex traded in a firm fashion with good buying interest developing in response to the stronger than expected manufacturing figures in China. In addition, reports the trade talks with China and the US were making progress also helped support the more constructive sentiment. The build up in net spec positions on both Brent and WTI continues to reflect ideas that supply availabiltiy will tighten in response to the declining rig counts in the US along with the production cuts undertaken by OPEC. In the background remain the concerns over the poltical unrest in Venezuela and the sanctions against Iran.
Despite the constructive price action the market has reached our 61.50 objective basis May. We suspect that prices near this level will prompt renewed interest in drilling in the US and provide additional incentives for the US to not only expand production but carve out an expanding market share in the world market. This situation has not been lost on Russia the other major producer who does not appear content to sit idly by given suggestions that they are not willing to remain in the OPEC led pact past the September expiration. Such a situation could undercut the agreeemnt and lead others to maintain production levels above targets.
In the background as a key consideration will be global economic trends particulalry in China and the EU. News of more favorable manufacturing activity in China might be an undication the global economic situation in stabilizing. However it appears it will take time to make that determination and resistance should build around the 61.50 level basis May. Any signs that Chinese economic growth is faltering would undercut values. For the most part it looks as if In the potential tightening of supplies in the near term has been now discounted and potential resistance near current levels should evolve.
The nat gas market attracted scattered support on renewed interest in the cash market helping support values. Some revision upward in demand forecasts helped uncover the better buying. We suspect the markets oversold condition was likely a big factor in the recovery. In addition ideas that the Cherniere Terminal will be returning to normal operations likely supported sentiment. Despite the recovery, values might be hard pressed to rally ahead of the EIA report. Forecasts point to a small injection of 3 bcf in this week’s report compared to a withdrawal of 34 last year and a five year average decline of 23. Concern over low stock levels should remain muted as the focus remains on the high production level which currently totals 88.5 bcf compared to 79.5 bcf last year. Given the low stock levels, we are inclined to be a buyer of August Gas at 2.73-2.75 as summer cooling and the need to build stocks fosters a tighter situation at end summer.
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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