Reports that Iran plans to restart deactivated centrifuges and increase its enrichment of uranium to 20 percent purity encouraged renewed buying which lacked follow through late. The heightened tension was exacerbated by the British seizure of an Iranian tanker bound for Syria last week as it entered the Mediterranean off the coast of Gibraltar. Reports Iran was considering other steps that would violate the nuclear agreement raises anew the pressure on European countries on whether they can continue to abide by the agreement in light of the US withdrawal and the imposition of sanctions on Iranian oil exports. The inability of European signatories to the agreement to fulfill their commitments to Iran and the intention of Iran to reduce its compliance with the agreement every 60 days has raised concern that it will expand to a broader conflict as long as US sanctions remain in place. In the background, remained reports that OPEC output in June reached 29.6 mb/d in June, the lowest level since 2014 due to further declines in production in Venezuela and Iran. At this level compliance by OPEC with the agreement reached 156 percent.
The product markets failed to display equivalent strength helping weaken the cracks particularly in gasoline which registered sharp losses. News that the US EPA had proposed a hike in the bio fuel mandate and mounting pressure on reducing waiver volumes appeared to undercut sentiment along with news Philadelphia Energy Solutions is looking to sell the fire damaged refinery helped undermine sentiment toward the gasoline and the RBOB crack which had strengthened recently. The RBOB crack shed over 1.00 per barrel and looks to have reached a major top Friday at 21.60 basis Sept and should test the 18.00 area as concerns rebuild over economic activity and likewise demand prospects.
We still believe the crude market is vulnerable to downside price pressures as concern over the Chinese and US trade negotiations remain in the background and raise questions over global demand prospects. Ideas that Iran and Venezuela are shouldering an outsized portion of the supply cut continues to undermine bullish sentiment on concerns about the market’s ability to absorb additional supply if the situation on either front changes. In addition, erosion of market share remains of utmost concern, particularly if countries outside the pact, most significantly the US, continue to expand production.
Prices failed to attract fresh buying at the higher levels as revisions downward in demand forecast for the next two weeks were scaled back. The weaker demand along with record high production appeared to limit interest at the higher levels despite record high LNG exports which are forecast to total 6.3 bcf over double the levels of last year as new terminals come into service. Fears that high storage levels in Europe will lead to shipment cancellations remain in the background but so far there has not been any confirmation. This week’s storage is expected to show a 67 bcf build, which would be below the 5 year average of 71 and halt the trend of above average builds. From current levels the market should encounter resistance as we begin to approach the 2.50 area basis Aug as fresh selling emerges on the moderation of temperatures in the latter half of the month.
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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