The petroleum complex attracted good buying interest following early weakness overnight on fears of growing political tension in Libya. Calls by the opposition government to mount a military offensive to take Tripoli and topple the UN backed government raised fears this will setback recent increases in Libyan production. In the background were threats by the Saudi’s to sell its oil in currencies other than the dollar if the US passes a bill exposing OPEC members to US anti-trust lawsuits. Additional support was provided by the jobs report today which showed an increase of 196K in March as a rebound in construction occurred. With the strength to equity values and suggestions that the US trade talks with China are progressing, the move to the upside is not all that surprising as the market appears intent upon focusing on bullish news.
Nevertheless, the market is still assessing how balanced the market really is. The Saudi’s have pretty much taken on the role of swing producer which in the past has not been an acceptable policy for the Kingdom. Although some might suggest the expansion in shale oil output is beginning to slow todays numbers by Baker Hughes showing an increase in rig count of 15 might suggest the higher prices are beginning to coax out additional output. With Russia continuing to suggest that they are unwilling to extend the current agreement, it appears that the decision for the Saudi’s to go it alone might need to be made in order to support prices. With both Iran and Venezuela still well below their sustainable capacity due to political obstacles, that could potentially change in a relatively short period of time the markets dependence on constrained production likely cannot be sustained over the longer term and will lead to imbalances in the market.
Although fears over impending tightness might persist we feel the bulk of constructive news has been discounted and the market remains vulnerable to downside pressure. Higher gasoline prices should help cut driving this summer. Prices near these levels will also 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.
The nat gas market attracted scattered support following yesterday’s larger than expected injection in stocks of 23 bcf. Some recovery in values was noted in response to the prospective return to full service of the Cherniere loading terminal. Nevertheless weak demand as temperatures moderate has tended to limit strong buying interest. The prospect that stocks will build again next week seems to be maintaining a bearish bias to values. Early expectations for the EIA report are for a build of 15 bcf compared to a 20 bcf draw a year ago and an average of 5 injection on the 5 year average. Concern over low stock levels at 30.5 percent below the five year average should remain muted as the focus remains on the high production level which currently totals 89.2 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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