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Energy Brief July 1

by Archer Financial Services | Jul 01, 2019
by Steve Platt and Mike McElroy

Price Overview

The petroleum complex failed to sustain strong early gains but closed firm. News that OPEC had extended supply cuts until March 2020 at their meeting which started today helped encourage early buying but failed to be sustained as renewed selling developed near the 60.00 area basis August once again. Non-OPEC who will be meeting OPEC tomorrow have indicated through Russia that they will also extend the supply pact through March. Developing fears that Iran and Venezuela are shouldering an outsized portion of the supply cuts continues to undermine bullish sentiment as fears arise over the market’s ability to absorb any additional supply if the situation with respect to sanctions on these countries begin to change. In addition, the erosion of market share remains of utmost concern particularly if non-OPEC countries outside the pact including the US continue to expand production. Another consideration encouraging selling continues to be the sentiment that the global economy is slowing limiting the growth in demand. The resumption of trade negotiations between China and the US helped temper bearish sentiment but doubts remain over how quickly an agreement might be attained.  Although reports suggested Russian output in June had fallen by an amount larger than the agreed amount under the OPEC accord, the decline was attributed to the contamination of exports flowing through the Druzhba pipeline.
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For now with the Agreement looking now like it will be extended; participants will be watching closely compliance. Prospective overproduction by both Russia and Iraq is possible especially if Iran exports remain near .3 mb as reported In June compared to 2.5 mb/d in April, 2018 before the imposition of US sanctions. Whether this oil finds its way to market will also need to be considered as a potential threat as well maintaining resistance in the 59.00-60.00 range.  

From a longer term viewpoint, it still appears the markets inability to respond to the retrenchment in export levels from both Iran and Venezuela puts the market in a precarious position as traders assess the longer range impact from the ongoing expansion in US production levels and the resulting increase in US market share at the expense of OPEC. Whether OPEC+ and particularly Saudi Arabia is willing to tolerate such a situation given the prospective slower growth in demand due to economic considerations and prospective substitution of renewables remains critical for the market.  

 

Natural Gas

The market traded under pressure reflecting forecasts for cooler temperatures later this month. Ideas storage will reach normal levels at end summer appears to limiting buying interest amidst record high production. An arbitration case in Mexico delaying pipeline deliveries along with fears of a growing global LNG glut appears to be also encouraging bearish sentiment.  However, warm European temperatures have helped increase demand due to increased cooling needs.  The prospect for moderating US temps should encourage further selling amidst forecast for another sizable build in stocks. This week’s report is expected to show an above average injection of 84 bcf compared to the five year average of 70 bcf for the same period. Given the high domestic production levels and a potential falloff in LNG shipments, values have potential to weaken back to recent lows near 2.17 basis August and possibly the 2.00 level before stabilizing.

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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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