The petroleum complex traded on the defensive as doubts emerged over whether tension between the US and Iran were rising while background bearishness surrounding Global supply demand trends remained. The recovery of crude values following the statement by Trump that the US had shot down an Iranian drone in the Straits of Hormuz lacked follow through following statements by the Iranian Foreign Minister that they had not lost an Iranian drone. The statement appeared to quash speculation that tension was rising between the US and Iran and instead appeared to refocus traders’ attention on statements by the IEA that continues to suggest the market will need to eventually deal with surplus crude supplies in the coming year. Fears demand will continue to be impacted by the lingering trade dispute between the US and China along with sluggish demand in the US amidst expanding production and lower than expected refinery runs. It appears that dollar strength has also affected demand in the emerging markets as subsidies are withdrawn in some markets. Undoubtedly the crude market seems to be struggling but cautious given the uncertain situation between Iran and the US and the prospects a flare up in tensions might revive precautionary buying interest. Nevertheless, the possibility that the US Administration might make a more concerted effort to move toward negotiations as the 2020 election begins could weigh on sentiment overall.
The product markets and particularly the ULSD market could become a major focal point as refiners stockpile product as new regulations go into effect for shipping in 2020 requiring them to use low sulfur diesel rather than bunker fuel. Although Distillate stocks have increased in preparation for the switchover rising by over 15 mb above year ago levels, the pressure on ULSD to Crude and also the spread to Gasoline basis the Dec has likely run its course and should begin to find some better support as the US crude slate continues to favor lighter products rather than the middle distillate. Subsequently, we would not be surprised that in the Dec ULSD crack and Dec spread against Gasoline; that significant lows have been reached and better support emerges as summer draws to a conclusion and buying on a seasonal basis begins to emerge in ULSD.
The market traded under modest pressure reflecting ideas that the moderation in temps forecast the next two weeks and return to more normal production as Gulf of Mexico rigs come back on line will lead to renewed weakness to values. Nevertheless with additional export terminals coming on line pressure on values might be limited to the 2.17-2.19 level where better support should emerge. Any return to above normal temps should aid a recovery in values ahead of the EIA report Thursday. Early expectations for the estimate suggest that stocks should build by a modest 46 bcf compared to 62 bcf compared to 27 injection a year ago and 44 bcf on the five year average.
Charts Courtesy of DTN Prophet X
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