The petroleum complex continued to attract good buying interest on the fears that growing political tension in Libya will impede the recovery in production that has been evident. Attacks by the main opposition forces against the UN backed government seems serious enough to threaten Libyan production levels. Threats by the Saudis to sell its oil in currencies other than the dollar were pushed into the background on doubts that the US will be able to pass the bill exposing OPEC members to US anti-trust lawsuits. In the background remains ideas that the US economy will strengthen as the year progresses and that the US and China are moving toward a trade agreement.
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. The Saudi Oil Minister indicated today that a meeting by OPEC next month will be key on deciding whether they should extend the cuts. At that time a better assessment of supply demand fundamentals can be made given the prospective impact of US policies against Venezuela and Iran.
Although fears over impending tightness in the near term might persist given the strength evident in the nearby month, the weakness to the back months to the nearbys since late March signal that these prices will likely weigh on the longer term supply and demand trends. Overall, 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 buying on forecasts cooler temps next week and on the prospective return to full service of the Cherniere LNG loading terminal. The prospect that stocks will build again this week should limit upside movement.
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 by DTN Prophet X and NOAA
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