The petroleum complex traded in an erratic fashion with follow-through selling overnight on ongoing concerns over the impact of the trade dispute between the US, Mexico and China. Fears that the trade disputes will lead to a contraction in economic growth and disrupt petroleum shipments from the US, helped undercut values initially. However downside movement was restrained and a recovery in values developed following comments by the Saudi Oil Minister and on the potential for a strike action by oil workers in Norway.
The Saudi Oil Minister indicated a consensus was emerging among OPEC+ members that they would continue working towards oil market price stability in the second half. The Saudis remain the key defender of the agreement with reports suggesting that their production fell in May to 9.65 mb/d compared to the production target under the agreement of 10.3 mb/d. How long the Saudis are prepared to shoulder the burden in restraining output to support values given increasing trade friction and the impact it might have on global oil demand growth remains to be seen. The high level of volatility which saw values weaken dramatically last week appears to have prompted the comments but does not guarantee they will be able to convince other producers to restrain production in a meaningful way given the expansion in US production levels and prospective loss of market share. If anything given the supply which has been held back by extraordinary events in Iran and Venezuela, the world supply situation could become more ample if a more stable political climate develops internationally. In Norway, the strike action scheduled to begin tomorrow has potential to support nearby values particularly on Brent which has benefitted more from the Iranian situation given the reliance on supplies from Iran. The action if undertaken could cut output by 440 tb/d or about 11 percent of production.
In the background remains the weakness to products. Maintenance turnaround did not have a significant impact on gasoline. Instead poor weather and the concerns over the economy have continued to undercut values. In addition, Mexico is the largest importer of US gasoline receiving 529,000 b/d of U.S. gasoline exports, or 56% of total U.S. gasoline exports in 2018. The trade dispute has the potential to impact these levels and weaken the August gasoline crack.
Nat Gas values remained under pressure falling over 5 cents again today and reaching under 2.40 basis July Nat Gas. Reports of slower LNG exports along with the prospect of weaker exports to Mexico helped encourage the weakness. Weather remains rather moderate and has helped limit stronger demand which this week is forecast to total 77.3 bcf compared to 78.8 bcf last week and 80.2 last year in May. The breakdown looks poised to test the 2.30-2.35 level basis July. Early estimates for next week’s EIA point to another large storage build of 107 bcf compared 102 on the five year average.
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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