The petroleum complex bounced back following yesterday’s price breakdown. Strength was linked to stronger equity values and ongoing fear that Libyan production will deteriorate as fighting for government control continues. The high level of supply disruptions, which also include the OPEC+ output cuts along with the expiration of Iranian waivers and Venezuelan production declines has brought the focus back on the supply side rather than the uncertainty associated with the demand side and the weakness to the global economy. The disruptions have helped balance the market at a time when stocks were high, but also has potential to overextend on the upside when sustainable production looks to be expanding.
The current adjustment process could ultimately lead to changes in the opposite direction as both demand and supply respond to price. This will have more of an influence as time wears on and higher prices have a chance to impact demand. How it plays out remains to be seen, but the impact of higher prices, particularly those artificially induced by policy and political events, all to often have a result which is the opposite of what you might expect.
In the near term we are content to sit on the sidelines in crude and look for a top to develop near current levels on the prospect that the supply disruptions will begin to reverse as we move into the 2nd half of the year. Any appearance that a resolution of the US/China trade dispute is about to take place could be used by world producers as an excuse to revive production levels and more aggressively fight for market share.
Prices traded in a limited range today after weakness seen yesterday following the EIA release. The 29 bcf build after reclassifications was above expectations and helped to push prices lower by nearly 4 cents on the session. Today’s activity was muted by a lack of any notable changes to demand forecasts as we work through the shoulder season. Underlying support emanated from the return to service of the Cheniere LNG loading terminal. Expectations for a large storage build next week kept end-week buying to a minimum. The estimated 80 bcf increase would be well above the 5 year average build for this time of year at 21 bcf. We continue to look for a tightening situation into the summer months and are looking to be a buyer of August in the 2.73-2.75 area.
Charts by 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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