The petroleum complex showed a modest recovery following recent sharp losses which took values down from a high of 66.60 basis June to as low as 60.95 yesterday. An oversold condition along with a favorable jobs report overshadowed recent bearishness which centered on the appearance that OPEC might be considering an easing in their production restraint along with continued increases in US crude production and inventories.
Any follow through of today’s action should encounter resistance overhead near the 63.50 area basis June. As we see the end of Iranian sanction waivers this week, the market will be closely watching the availability of Iranian oil to the world markets. Given the Trump Administration’s aim of cutting their exports to zero, and the Iranian’s lack of reporting to OPEC, the assessment of export levels is likely to be far from exact. Estimates for Iran in April ranged from 1 to 1.3 mb/d. Expectations are for shipments to fall to between 200 and 600 tb/d. Given the lack of available data and efforts by Iran to continue selling oil to key consumers such as India and China, the market will be sensitive to any surprises, particularly that of unaccounted oil exports that could slip through and be missed by tanker traffic data. Balancing the market amid such uncertainty will be difficult for OPEC+ as the need to maintain market share as US production expands is balanced against price levels that fulfill domestic objectives. Subsequently rising inventories not only in the US but also in Europe and Asia will need to be watched closely as the crude market assesses the impact of US sanctions on Iran. In addition potential growth of demand in both the European and Asian economies will be a key variable.
A larger than expected build in inventories reported yesterday exerted some downside pressure on the market, but for the most part prices held up well to the negative news. The 123 bcf build was well above expectations at 113, and June tested the 2.55 area on the downside twice after the report but found good support as today’s settlement at 2.566 is less than 2 cents below the levels seen just prior to the release. Next week’s injection is expected to be above normal again at 86 bcf against the average at 72 as current storage levels stand at nearly 18% below the 5 year average. The markets ability to hold above the late April lows in the face of negative fundamental influences appears to signal that the lows have been established on the summer contracts. With weather currently offering a neutral to bearish influence, expect range bound trade as we get thorough the shoulder months and begin to evaluate summer weather trends.
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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