The petroleum complex traded sharply higher following stockpile reports which showed a larger than expected draws in both crude and gasoline in the API and DOE reports. The penetration of the 60.00 resistance area was impressive. In the background was a developing tropical cyclone off the coast of Louisiana which forced the shutdown and evacuation of oil rig personnel. In addition, a recovery in equity values and downturn in interest rates also provided the basis for some pull back in sentiment reflecting concern over the global economy and recent dollar strength.
The DOE report showed crude oil inventories declining by 9.5 mb compared to forecasts for a decline of 3.1 mb decline. Crude stocks at Cushing declined .3 mb while stocks on the Gulf Coast fell by 6.7 mb. Gasoline product supplied totaled 9.7 mb an increase over previous year ago levels which totaled 9.3 mb. So far this year, gasoline supplied has not changed from previous year levels underlining the stagnant growth in US demand. Distillate product supplied totaled 3.6 mb, .3 mb below year ago levels while so far this year distillate demand is off .2 percent. Capacity utilization was indicated at 94.7 percent with refineries on the Gulf Coast and in the Mid-West operating at 97.8 percent and 96.5 percent respectively while on the East Coast refinery utilization was only 69.5 percent due to the closure of the Philadelphia Energy Solutions refinery. The high refinery rates helped revive strength in the cracks following recent weakness.
The appearance that the Fed will likely make at least a ¼ point cut in target rates does help relieve selling pressure linked to speculation of a contraction in economic growth. This along with the ratcheting up of tension between Iran and the US due to sanctions and production restraint on the part of OPEC+ looks poised to attract fresh buying interest that should carry values back up to the 63.00 and potentially 66.00 in WTI basis prompt. Some clarification of prospective supply-demand will likely be gleaned from the OPEC monthly report scheduled for release tomorrow and the IEA Monthly report on Friday.
The strength to the product cracks looks to be a combination of influences that include high refinery utilization along with the move to replace bunker fuel with diesel on ships in 2020. Near term concern over refinery operations due to the storm has also provided support but in the absence of damage should quickly fade. .However, product stocks appear to be adequate and the stagnation in US demand reflecting greater fuel efficiency should remain a source of concern. Near term concern over refinery operations due to the storm has also provided support but in the absence of damage should quickly fade. Subsequently we would look for renewed resistance near the recent high of 21.60 basis the Sept RBOB crack to be formidable. In crude, we still believe the market is vulnerable to downside price pressures as concern rebuilds over the Chinese and US trade negotiations and on ideas that Iran and Venezuela are shouldering an outsized portion of the supply cut. However, the momentum appears to be on the upside following todays’ action and the potential exists for values to test 63.00 and possibly 66.00.
Prices attracted renewed buying interest on the revised upward forecasts for demand later this month as temperatures warm to above normal levels in the eastern half of the nation and production is curtailed by the storm in the Gulf. Although the potential exists that LNG shipments might be disrupted by the storm, the pick-up in demand and prospects for a constructive EIA report tomorrow appeared to support values. Expectations point to a build of 67 bcf which would be below the 5 year average of 71 bcf. Fears shipments to Europe might be cancelled appear to have faded as prices strengthen in Europe due to above normal temps. We still see the potential for resistance to build near 2.50 near term basis August.
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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