The petroleum complex came under pressure as trade tension continued to mount following yuan weakness overnight as the Chinese currency broke the 7.00 level against the dollar for the first time in a decade. Ideas the weakness was in reaction to the move by Trump to impose additional tariffs on Chinese goods entering the US in September helped lead to a flight from riskier assets, such as equities, and a move into safe harbor instruments such as fixed income treasuries. The uncertainty with respect to global economic activity also helped undercut the petroleum complex and particularly products, where concerns over the impact of the trade conflict on US exports helped undercut values.
We still maintain that the trade threats and their impact on the global economy are not the only bearish influence affecting oil values. Demand concerns remain a limiting influence, but the expansion in output outside of OPEC remains of utmost concern. With growth likely to be maintained by non-OPEC producers at a time when OPEC is running well below capacity, the potential that shut-in production will eventually be available to the market at a time when growth in demand will likely continue to be sluggish has the potential to be a source of long-term weakness.
The competition from other producers is being felt, with reports indicating that the Saudis are considering a cut in oil prices to their Asian customers in September for the second straight month. The Official Selling price for Arab Light could drop by at least 50 cents, falling below a premium of 2.00 per barrel for the first time in four months. Asian incremental demand for September loading of Middle East crude appears to have weakened, with several North Asian refineries closing for maintenance in the autumn. In addition, the increasing sales of Russian and US crude and displacement of Saudi barrels in China remains a concern and will likely be a longer-term global phenomenon creating the incentive for competition at a time when the Saudis and OPEC are attempting to preserve market discipline. With the Plains All America Cactus Pipeline expected to start service soon from the Permian Basin and moving an additional 670 tb/d, these barrels should become available to the broader market and for export soon, keeping pressure on other International producers. Subsequently recoveries in September crude are likely to be short-lived with good resistance in the 57.00 area in the absence of constructive news on the supply front.
The market continued to struggle today as the active September contract probed out a new low, dropping to 2.029 intraday before settling down 5 cents at 2.07. Macro concerns were seen across the commodity spectrum after China followed up President Trumps’ additional tariff warning with a statement saying that they would be suspending the purchase of agricultural products from the US. Fundamental news contributed to the weakness as production hit a record yesterday at 91.5 bcf/d in the face of weather forecasts that do not indicate any demand spikes into the middle of August. With another new low today, we continue to expect the market to test the 2.00 area near term. Thursday’s storage report is pegged at a 55 bcf injection compared to the average for this time of year at 43.
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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